Let’s say your friend Ricky Baller just signed as a pro athlete. 20 million contract, 10 mil guaranteed, 5 years. (for some round numbers)
He wants to live it up, but also have a significant amount of money left because he doesn’t know when/if he’ll get hurt.
How would you handle things?
It seems like there’s 3 main parts - investing the assets, coming up with a system to encourage Ricky to stick to a budget, and hopefully for Ricky to understand the idea of getting the most bang for the buck. Don’t treat his money like water - use it efficiently even if he has a lot of it.
Don’t make it rain in the strip club - hire real hookers outside the club and pay them a fixed fee, half or so upfront, half at the end of the night. Don’t buy a lambo, rent. Ditto for boats, islands, private jets, and so forth. Don’t borrow money. Don’t invest money in friend’s schemes. Invest in index funds - nobody to scam you. If you gotta help a friend out, don’t give him cash. Pay his tuition or bail or whatever directly.
He gets to withdraw or spend money as he pleases, right - I can’t actually stop him from blowing $1 million on a shopping spree if he insists?
I think your advice is sound. I’d start a 401(k) and/or IRA, open a savings account, invest in sound assets, get him to buy a good house or two in a place where real estate value will rise. Buy gold, silver, precious metals. Buy the best medical insurance coverage possible. And he should retire before he gets concussions. Tell him to get a degree after he retires - a useful degree like accounting or computer technology.
I wonder if there’s a way to prevent that. Some kind of agreement where he can’t spend past a certain amount without a 3-day “cooloff” period or something, or if the expense is for medical treatment.
I mean, if he wants to blow a mil, it’s his money, but you’re essentially asking him to have to wait a few days for a withdraw from the bank or something, giving him enough time to sober up and maybe consider if it’s worth it.
I seem to recall David Niven talking about this sort of thing in Hollywood. His business manager put him into an appropriate house & car, and gave him a modest, but adequate, allowance. I don’t know if this was a contractual arrangement, or if it only worked because Niven went along with it.
Form a trust…? Maybe…?
Talk to a licensed professional? Absolutely!
You need professional tax and investment advice; message board advice on that is just ridiculous.
“Mr Habeed, What On Og’s Green Earth possessed you to think that you could spend all of your clients money trying corner the market on Twizzlers… and make a profit!?”
“Your honor, I posted on this message board on the internet and…”
“gavel slam Guilty! Eight years with no option for parole… sentence pending competency evaluation… Next case…”
It’s a hypothetical. I don’t have such a friend. The basic concept is : even an amateur could probably do better than most of these money managers. An honest amateur could probably do better than many professionals. (if you aren’t trying to scalp and nickle and dime your buddy with fees)
It’s not that complicated. Save most of your money. Invest it in no fee index funds and bonds (they make funds where it’s all combined into one). Don’t blow money inefficiently - you can rent the exotic car, rent the boat, rent the hot women, and when you rent, you choose a reputable rental supplier.
I ain’t saying an amateur who follows the above, keeping track of it all in some simple set of books, would do better than a licensed set of pros. I’m saying he’d do ok - our hypothetical athlete, if he went along with it, would have lots of money when his career is over.
The biggest problem these guys face are the “friends” who just want to go along for the ride and get as much for themselves as they can.
But the second biggest problem these guys face is real friends and family members who genuinely are trying to do the right thing but are just not equipped to handle finances at this level and get in over their head. You see a lot of athletes and entertainers who get burned because they put trust ahead of competence. Your brother might not rip you off but that doesn’t mean he won’t lose your money anyway.
If a family member won a lottery jackpot or signed a eight figure contract and inexplicably asked me to be their financial manager, the first advice I’d give them is to hire a better financial manager.
“If he went along with it” being the key phrase. From what I’ve heard, many of these guys have no experience with managing large sums of money (but then few of us do) and sometimes have a large crowd of hangers-on (i.e., a “posse”) who want their cut, or want to live just as large.
And this advice " I’d start a 401(k) and/or IRA" is inadequate, as you’re going to hit the contribution limits almost immediately.
Personally, I’d invest the majority of the money in a three-fund portfolio using Vanguard ETFs or mutual funds. But at that level, you need someone to manage the tax implications and do some estate planning.
I’d hire a professional, and then hire myself to be something I’d be better suited for, like his cook or nanny or medical advocate. I have no qualms about riding the gravy train with my best friend, but I’d like the gravy to last until dessert, and I have no idea how to manage money.
Fall back on the most basic of advice. Spend what you have left from saving, don’t save what you have left after spending.
I would reach an agreement with my sports star friend on what he thinks he could live on and split his income into three streams;
Savings - to be invested appropriately (probably with the assistance of a qualified financial planner/adviser.
Fixed expenses - set this aside to meet, recurring ongoing fixed expenses, like housing costs, a car, insurances, taxes, a certain level of living expenses, etc
Lets call it an allowance - My mate gets this left over from the other two which are met first, probably doled out weekly, to do with as he pleases, hookers and blow, hangers on, other impulse stuff.