Why do so many people who make a lot of money go broke?

Don McNay has an interesting column about sports stars who make millions and blow it.

Sports Illustrated did a fascinating study in 2009 titled “How (and Why) Athletes Go Broke.” The statistics are stunning. By the time they have been retired for two years, 78 percent of former NFL football players have gone bankrupt or under financial stress because of joblessness or divorce. Within five years of retirement, an estimated 60 percent of former NBA basketball players are broke.

These are people who made millions. What happened?

I see a lot of them blow money on large entourages and wild spending, the same way many lottery winners do. But I see a lot more get burned by getting involved in businesses far away from their area of expertise.

Like lottery winners, athletes are not very good at managing money.  First, they live a lifestyle that is unsustainable after they retire.  Second, they fall prey to unscrupulous people who promise them financial returns that are simply impossible.  And if you don’t’ know much about managing money who are you going to listen to: the huckster who promises to double your money overnight or the planner who recommends conservative investments with modest returns?

It’s not that hard to be financially secure. You spend less than you make, you save the rest and don’t do anything stupid. You assume you are going to live to an extremely old age and make sure you have money that lasts as long as you do.

It’s not hard, but it’s tedious. And it’s not the least bit glamorous.

I knew of a woman who was always trying to meet a guy driving a new Mercedes.

She should have been looking for someone who drives a 10-year-old Toyota. The Toyota driver is more likely to have real wealth in the long run.

Good advice.

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