Professional athletes are often recipients of seven-figure signing bonuses when they join a team — and what they do with this money can have a major impact on both their short- and long-term financial stability. Chad Willardson, president of Pacific Capital, mentors ultra-high-net-worth individuals and several major athletes, so he has been in the position to advise these athletes on what to do with these cash windfalls.
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While you might not be receiving such a large cash infusion, it can be helpful to know some of your best options when you receive a bonus or other windfall. Here’s what Willardson advises his athlete clients to do with this cash.
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Build a Financial Safety Net
“The money needs to be divided into safety, passive income and long-term growth,” Willardson said.
The portion dedicated to building a safety net should go into low-risk investments.
“Anything from CDs to U.S. Treasuries to insurance-based accounts to high-yield savings accounts,” Willardson said. “All of those options [provide] liquidity.”
These are especially great options in our current rate environment.
“[These accounts] may be paying you 4% to 6% in today’s environment,” Willardson said. “That can change, obviously, based on what’s happening in the country, but right now, 4% to 6% on your safe money is excellent. Ten years ago when you were getting 0%, it was a lot harder to swallow.”
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Create Passive Income
Another portion of the cash windfall should be invested into an asset that will provide passive income.
“They could invest in real estate, they can invest in bonds,” Willardson said. “A lot of professional athletes, depending on what state they live in, can invest in tax-free bonds. That’s something that really helps for their high income.”
Invest for the Long-Term
A final portion of the cash should go into investments that will provide growth over the long term.
“They’re looking at the stock market, private equity, venture capital or individual businesses,” Willardson said. “Some of them are even looking at cryptocurrency.”
Spreading Out the Funds Is Key
Willardson said that no matter where you ultimately decide to put your money, the most important thing is that you have all three bases covered.
“Having those three buckets separated and putting the appropriate percentage in each of those buckets is really the most important decision that they can make,” he said. “They might only focus on the growth category and if the markets go bad and the economy goes bad, they have nothing — nothing that’s paying them income and nothing that is safe and protected. And that’s when we see these athletes go bankrupt and have lots of financial problems.”
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This article originally appeared on GOBankingRates.com: I Manage Money for Pro Athletes: 3 Things I Tell Them To Do With a Cash Windfall
