Prudent Portfolio: How to Manage Money When You Come Into Money
By Kevin Peters
It’s baseball season, and in an annual ritual as reliable as robins showing up on the front lawn, baseball players – veterans and rookies alike – hope to show off their skills.
There are 466 Major League players with a base salary of $1 million or more. The highest annual base salary this year is $38.3 million, going to pitcher Stephen Strasburg of the Washington Nationals. The Philadelphia Phillies signed outfielder Bryce Harper to a 13-year contract that will pay him $330 million!
The veterans, for the most part, may be accustomed to their upscale lifestyle, but for those whose careers are just beginning, there will be a lot of money in their pockets, more than they could have imagined.
Some analysts compare young pro athletes to young lottery winners, who suddenly come into a huge amount of money with little or no idea how to invest wisely or prepare a solid foundation for future fiscal security.
For those not in the MLB or who have not won the lottery, similarly-sized windfalls are still possible. Consider the individual who is selling a long-established business or a house, or receiving a sizable inheritance, or the savvy investor that has identified a “unicorn” and benefited from the skyrocketing stock price.
A new bundle of cash will present myriad opportunities, but like for rookie athletes, can come with tremendous pressure to be responsible in spending and investing, fund retirement and leave a legacy for the future.
Before doing anything, take into account that a windfall, like an athlete’s years on the field, and thus their salary, can be finite. Professional athletes may find themselves earning lots of money early in their careers. But that money can disappear just as quickly as it is earned, if recipients are cavalier with their spending habits and ignore the lessons that foster intelligent investing.
First, plan for the future. Save for retirement. To have a better chance of financial success, be cognizant of the basics of personal finance – basics that I believe are often ignored when emotions overtake rationality.
Sadly, many pro athletes will be bankrupt or under financial stress within five years of entering retirement. So begin to think ahead as soon as you come into a lump sum.
Place funds into retirement accounts that are tax deferred, such as an IRA or 401(k), which can address two long-term issues at the same time: saving money and helping to reduce taxes.
By starting a retirement account early, along with accounts such as trusts for expenses like college for children, investors can build on decades of growth that may result in sizable assets when they are needed.
Plan for the unexpected. Consider how often an athlete’s career is cut short by injuries. Are you prepared for a health scare or another unforeseen expense? Be sure to start building an emergency fund that can be leveraged for the unexpected.
Create a budget to stay organized and on track and try to avoid overspending and impulse purchases. This is a good way to ensure you are not spending outside of your means or spending too heavily in one sector.
For all of us, including those with a formidable throwing arm or the ability to making leaping one-handed catches, there are lessons to be learned when it comes to acquiring sudden wealth.
If we take the time to be mindful of the basics of investing, obtain solid advice from experts in financial planning and tend to our finances with the same attention that athletes give to physical fitness, we can avoid the pitfalls and make our personal finances a lifetime success story.
Kevin Peters is a financial adviser with the Wealth Management Division of Morgan Stanley in Purchase. He can be reached at 914-225-6680.
The information contained in this column is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney, LLC, member SIPC.
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