One of the most common financial perils among professional athletes is the uncertainty of future earnings. When paired with a lack of financial literacy from young men and women athletes entering their first – and in some cases only – professional contracts, it can be a recipe for disaster and significant financial loss.
However, with the recent changes in NCAA policies regarding Name, Image, and Likeness (NIL) deals, student-athletes now have the opportunity to earn money outside of their athletic scholarships. They can now earn compensation for endorsements, sponsorships, and social media promotions. The NCAA’s recent policy change has opened up a new world of financial opportunities for student-athletes.
Additionally, earning cash while in college allows aspiring professional athletes to get hands-on experience in investing while building a foundation before cashing in at the professional level.
Emergency Fund
For college athletes with NIL deals, before getting into investments, it is essential to highlight the importance of setting up an emergency fund. An emergency fund is a savings account people can tap into in case of unexpected expenses, such as medical bills or car repairs.
Setting up an emergency fund is often vital for college athletes with NIL deals because it can help them avoid dipping into investments and other savings in an emergency. Ideally, emergency funds should be able to cover at least three to six months’ worth of living expenses.
To set up an emergency fund, start by calculating monthly expenses, including rent, utilities, food, and transportation. Then, multiply that number by three to six to determine how much to save.
Retirement Accounts
While retirement may seem a long time away for college athletes with NIL deals, setting up a Simplified Employee Pension (SEP) IRA can be a great way to build tax-advantaged compound interest toward retirement. A SEP IRA is a retirement account that allows account holders to contribute a percentage of their earnings, up to a specific limit, to a tax-deferred account.
SEP IRAs are a good option for college athletes with NIL deals because they offer tax benefits and allow account holders to save for retirement. However, remember that SEP IRAs have contribution limits and early withdrawal penalties.
Non-Retirement Accounts
In addition to diversification and setting up an emergency fund, college athletes with NIL deals should consider investing in non-retirement investment accounts. These accounts, such as individual brokerage accounts, allow account holders to invest in various assets, including stocks, bonds, and mutual funds.
Non-retirement investment accounts are a good option for college athletes with NIL deals because they offer more flexibility than retirement accounts. With a non-retirement investment account, account holders can withdraw their money at any time without penalty. However, remember that any gains made from these investments will be subject to capital gains taxes.
Diversification
College athletes must understand that investing is not a get-rich-quick scheme. Instead, it’s a long-term strategy that requires patience, discipline, and knowledge.
One of the most critical investment strategies for college athletes with NIL deals is diversification. Diversification refers to spreading investments across different asset classes, such as stocks, bonds, and real estate. The goal of diversification is to reduce the risk of losing money in any one investment.
Diversification is essential for athletes because their earnings are rarely consistent. By spreading investments across different asset classes, investors can help ensure that they have a steady stream of returns, regardless of the performance of any one investment.
Liquidity
Finally, when investing as a college athlete with an NIL deal, it is important to consider investment liquidity – how easily assets can be converted into cash. Consider keeping some savings in liquid assets, such as cash or money market accounts, so that it is quickly accessible in the case of an emergency or unexpected expense.
Remember, investing requires patience and discipline. College athletes should consider financial goals, risk tolerance, and time horizon, and seek professional advice to help make informed investment decisions. Starting early and seeking professional advice can help these athletes make the most of their NIL deal earnings and give them a solid financial foundation before turning professional.
Investing can be a powerful tool for college athletes with NIL deals, but it’s crucial to approach it with caution and knowledge. By diversifying investments, setting up an emergency fund, and considering non-retirement and retirement accounts, these athletes can help ensure long-term financial stability.
Brian Menickella is the founder and managing partner at Beacon Financial Services, a broad-based financial advisory firm based in Wayne, PA.
Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.
Read the full article here