Authors: Stephanie R. Yates

Corresponding Author:
Stephanie R. Yates, PhD
University of Alabama at Birmingham
1150 10th Avenue S
BEC 310-B
Birmingham Al, 35294

Stephanie Yates is the Director and Endowed Professor for the Regions Institute for Financial Education (RIFE) at UAB. The RIFE focuses on increasing financial literacy in students and adults throughout Alabama and beyond.

Money Management for Student Athletes Transitioning to Professional Sports: How to Plan When Cash Flows are Uneven and Uncertain

This paper provides financial guidance for student athletes transitioning to professional sports. Sound financial planning is important in the absence of professional assistance. This paper outlines key budgeting tasks for the professional athlete. This paper also provides a sample case to illustrate how an athlete might manage his or her finances and blank worksheets are also included. Adherence to a budget that is useful but not overly restrictive can help a young athlete manage income uncertainties and prepare for a stable financial future.

Keywords: money management, professional athlete, budgeting

Student athletes who transition to the world of professional sports often find themselves in a position where they go from having limited financial resources to exponentially higher incomes with little experience in managing money. Further, it can be difficult to find a financial advisor that is trustworthy – especially for athletes who travel abroad to continue their sports careers. Since careers are typically short – less than 10 years – for athletes, sound money management is even more important for those who earn large salaries for a short time period.

The purpose of this paper is to provide financial guidance for professional athletes and student-athletes who are planning to pursue a professional career. This paper discusses creating a budget, saving for emergencies, and off-season and foreign currency issues.

50/30/20 Budget
Once you have an executed contract, the first thing that you should do is create a spending plan or budget that outlines exactly how you will spend and save your money. It is important to complete this process before you begin spending or incurring new financial obligations. This plan will act as a roadmap to help you create a path to achieving your financial goals.

An ideal way to begin this process is to use the 50/30/20 approach put forth by Elizabeth Warren and her daughter, Amelia Warren Tyagi (2006). Warren and Tyagi argue that by maintaining your spending in three broad categories within certain limits, you should be able to achieve your lifetime financial goals. Those three categories are: 1) Needs; 2) Wants and 3) Savings and the authors argue that you should spend 50%, 30% and 20% of your money in each category respectively. A key feature of this approach is that it forces you to think critically about your needs versus your wants and then put hard limits on each.

Needs are what Warren and Tyagi (2006) call “must-haves”. They include housing, transportation, groceries, insurance, and the clothes you really need. Although the specific items that fall into this category will vary slightly from one person to the next, this category includes the items that an individual requires regardless of his income. However, items such as charitable contributions and cellular phone service are a necessity to some but a luxury to others. This category is the key to making this spending plan work. Although the majority of your money is allocated to Needs, many people struggle to constrain their spending in this category to just 50% of their after-tax income. This is typically because they spend too much on fancy houses and cars. Further, spending in those areas are typically long-term commitments that are hard to get out of when you realize that you cannot afford them. Therefore, the less you spend here, the more you can spend on having fun.

The largest portion of the Needs budget tends to go toward housing. A great way to make sure that you do not overspend on housing is to think like a banker. That is, determine your housing budget based on the ratios that bankers use to determine housing affordability. The “front-end” ratio measures the monthly mortgage payment relative to monthly after-tax income. An affordable mortgage relative to one’s income, drives this ratio to no more than 28%. When designing your personal budget, this is a great rule of thumb to use even if you are renting. It is also helpful to consider all of your monthly debt payments relative to after-tax income. These payments include mortgage or rent, auto loan payments and credit cards, and should not exceed 36% of income.

Wants include clothing beyond the basics, entertainment, restaurant meals, and anything else that is not a necessity. Think of these items as luxuries that you would not spend money on if you lose your contract. This category also includes cash for everyday spending money. Initially, you might think that having 30% of your money as spending money is too much. The idea here is that allowing yourself a large budget for discretionary spending actually helps you to stick to your budget. In addition, you may underspend in some weeks, which would allow your spending money to accumulate so that you can splurge from time to time. When a budget is too restrictive, it is hard to follow. That means you may be more likely to get frustrated and overspend – using money that you allocated for other things. If you have plenty of money to spend as you please, you should not have trouble paying your bills or setting aside money for a rainy day.

The remaining 20% of your money goes to savings. However, repaying debt falls into this category as well. This is because you have to satisfy your debt from the past before you can save for the future. In that regard, debt is negative savings. That is, the money you spend to repay prior obligations is money that you cannot set aside to fund your future. That means those debt payments are keeping you from being able to save. However, once they are satisfied, saving 20% of your income on a continuous basis should not only help you to avoid incurring new debt but also help you plan for a comfortable retirement.

Dave Ramsey (2013) offers seven baby steps to financial fitness. They are: 1) Save $1,000 cash; 2) Start the debt snowball; 3) Finish the emergency fund; 4) Invest 15% of your income in retirement; 5) Save for college; 6) Pay off your home mortgage and 7) Build wealth. When planning your savings, consider integrating Dave Ramsey’s approach with the Warren and Tayagi (2006) advice. This would mean setting the following priorities with regard to the 20% of your after-tax income that you allocate for savings: 1) Make the minimum payments on your debt obligations; 2) Save $1,000; 3) Repay debt; 4) Increase your emergency savings to cover six months or more of your needs; 5) Save and invest to build wealth.

When putting a spending plan together, you must first cover basic needs. Debt obligations come out of the 20% that are allocated to savings. In addition to being negative savings, debt repayment that is not related to housing and transportation is not a priority. When your financial resources are limited, paying your mortgage or rent and car loan will be more important than a credit card bill. In addition, credit card companies tend to be more willing to renegotiate debt than secured creditors. Secured creditors are less inclined to renegotiate debt because they can foreclose on or repossess property that they can then sell to satisfy the debt. Unsecured creditors have little recourse other than place your account with a collections firm that will likely pay them less than half of what they collect from you.

Saving $1,000 is the next saving priority because having a small emergency fund can keep a minor mishap from derailing your financial plan. Further, a recent study (Huddleston, 2016) found that less than 69% of Americans have $1,000 in savings. This was up from 62% in 2015. In addition, building an emergency fund will also help you to survive if your team cannot pay you in a timely fashion, as is often the case for smaller, foreign, cash-strapped organizations. How do you find $1,000 to save? If you do not have the means to open a savings account with $1,000, a great short-term goal would be to save that much money in one year’s time. The 52-Week Money Challenge is a great way to make that happen. This challenge is largely attributed to a 911 dispatcher who was looking to save more money while struggling to make ends meet. The Challenge enables you to save $1,378 over a 52-week period starting with $1 in the first week and increasing your savings by $1 each week (Washington, 2013).

Once you have established a modest emergency fund, it is time to repay any debt you may have accumulated. There are two primary methods for constructing a debt repayment plan. One is the ‘debt avalanche’ and the other is the ‘debt snowball.’ The difference between the two depends on how you prioritize debt repayment. The debt avalanche prioritizes debt repayment based on interest rates. Financial wisdom suggests that prioritizing based on interest rates is the best method because it reduces the total amount that you pay since lenders will charge interest based on a balance that is declining more quickly due to the additional payments. However, using the debt snowball method that prioritizes based on balances, makes more sense psychologically because of the immediate gratification of paying a debt in full. The debt snowball method may cost you more in interest charges in the end, but some individuals are more likely to stick to their debt repayment plan when they can see the number of lenders that they owe declining. In fact, Dave Ramsey (2013) would suggest that you hang a list of your creditors in some prominent place so that you can cross off each name as you repay your debt. This constant reminder of the progress that you are making will act as a motivator to keep you on track. In either case, each time you pay a debt in full, you apply the payments from that debt to the next debt on your priority list. The main difference is that the debt avalanche method results in large repayments periodically, while the debt snowball method results in slower repayment but more immediate gratification.

Once you are out of debt, you can increase the size of your emergency fund. The optimal size of your emergency fund depends on how long you think it would take you to recover from a financial emergency such as a loss of income. Most people relate this to the average duration of unemployment. According to the Bureau of Labor Statistics, this is 23.7 weeks (Economic News Release, 2017) or five to six months. However, professional athletes may experience a longer unemployment duration due to either contract negotiations or the length of the off-season. Because the off-season is expected, you should put some of your money into an escrow account if your team does not automatically do this for you. This will lower your spendable income each month during the regular season, but will allow you the same standard of living during the off-season as you enjoy during the regular season. You will need to make your own estimate of the duration of a loss of income for other reasons such as contract negotiations, injury, etc. Therefore, a reasonable emergency fund goal for a professional athlete is to set aside enough money to cover your needs for one full year. Most athletes tend not to return to the sport after an absence of more than a year.

Finally, after building a solid foundation, athletes should begin saving and investing to build wealth. Warren and Tyagi (2006) suggest focusing on three key areas: retirement, real estate, and personal goals. Specifically, if you have followed all of the other steps to this point, you should be able to allocate a full 20% of your after-tax income to wealth building. They suggest that you should save 10% for retirement and you should split the remaining 10% equally between real estate and personal goals. You should use your real estate allocation for a down payment on or paying off the mortgage on your personal residence. These funds are in addition to the monthly payments that you have budgeted as “Needs”. Personal goals are the large purchases that are important to you. The aim is to be able to make these purchases without incurring debt. Therefore, you should try to save 5% of your after-tax income for buying cars, or businesses or any other major purchases.

Sample Case
The following case study for a fictitious professional basketball player illustrates the financial guidance outlined in this paper. Assume that this player signs a one-year international contract with the following compensation terms (all in after-tax American dollars):

  • $2,500 to be paid upon arrival and completion of physical exam
  • $7,500 to be paid September 10th
  • $10,000 to be paid on the 10th of each month from October to June

This results in a total contract value of $100,000 excluding bonuses. Further, assume that the athlete has two credit cards with outstanding balances. Credit card A has a balance of $138.76 with an 18.24% annual interest rate and a $35 minimum payment. Credit card B has a balance of $7,017.51 with a 12.99% annual interest rate and a $162 minimum payment.

First, this athlete should determine how much this contract equates to on a monthly basis including the off-season by taking the total contract value and dividing it by 12. This gives a monthly value of $8,333.33 from September through June of the following year. However, because the athlete will be paid $10,000 per month, this leaves $1,666.67 that the athlete can save each month for the off-season months of July and August. The athlete should place this money in a separate savings account so as not to confuse it with savings for other financial goals. By doing so, this $1,666.67 per month for 10 months will accumulate to $16,666.70. This will provide the athlete with $8,333.35 per month in the off-season, which is just as much as he had during the regular season. Tables 1 and 2 show the monthly cash flows for this athlete during the regular season and off-season respectively while Table 3 shows how the off-season saving account will grow over time.

Table 1

Table 2

Table 3

Now, the athlete can develop a monthly spending plan based on $8,333.33 per month in after-tax income. Using the 50/30/20 approach, this would leave $4,166.67 for Needs, $2,500.00 for Wants, and $1,666.67 for Savings. Using two separate bank accounts to handle monthly income is ideal to minimize overspending and using ‘bill money’ for luxury items. The athlete should deposit the full $10,000 monthly paycheck as follows:

  • $1,666.67 for Escrow or off-season funds into savings account 1;
  • $4,166.67 for Needs into checking account 1;
  • $2,500.00 for Wants in a second checking account with debit card access; and
  • $1,666.67 for Savings into a second savings account.

Ideally, both savings accounts and checking accounts should be with the same bank so that you can easily transfer funds between accounts. For international players, it may be wise to open a checking account at a local institution for your discretionary funds or “Wants” and use a bank in the United States for managing your funds allocated for Needs and Savings. This is to make it easier for you to access funds in the local currency during the regular season while also addressing obligations at home. In addition, many foreign contracts are denominated in U.S. dollars. Remember to liquidate your foreign account at the end of the season in case you choose not to return the following season.

Of the $4,166.67 available for Needs, the athlete should spend no more than 28% of total after-tax income or $2,333.33 on mortgage or rent payments. Since many overseas contracts include housing as part of the compensation package, many athletes can ignore this expense altogether or use this budget to maintain a home in the United States for use in the off-season or other family members. This leaves $1,833.34 per month for transportation, groceries, insurance, basic clothing and any other necessities. Remember that the goal is to keep necessities to 50% or less of annual income. In this case, if the athlete is able to hold annual necessities to under $50,000 or less than $4,166.67 per month, he or she should keep that money in reserve for irregular expenses related to housing and transportation.

The $2,500 for Wants is to be used at the athlete’s discretion. It amounts to just over $575 per week and is best managed in cash. Using cash for discretionary spending is the best way to prevent overspending. Once the money is gone, it is gone. Some opt for an envelope system. In this system, you budget specifically how you will allocate your discretionary spending across categories and place the exact amount of budgeted cash into an envelope corresponding with each category. For example, this athlete may choose to use just three envelopes and put $1,250 per month in an envelope marked “Dining Out”, $750 in an envelope marked “Clothes” and $500 in an envelope marked “Miscellaneous”. Thus, as the athlete incurs expenses, he or she uses cash from the appropriate envelope to pay for them. If you run out of cash in a particular envelope, you cannot incur any additional expenses in that area or else you will need to use money from another envelope which lessens what you can spend in that category.

Finally, our athlete will have $1,666.67 available each month for saving. First, he or she must determine how much of that he or she needs to make minimum debt repayments not related to housing or transportation. Then, he or she should open another savings account – separate from the off-season escrow account – and deposit whatever money remains after making minimum payments on debt up to $1,000. This is the start of an emergency fund. If there is any money left after making minimum debt payments and depositing $1,000 in the emergency fund, our athlete should apply those funds to the highest priority debt. Therefore, in September, the athlete allocates $197 to minimum debt payments, $1,000 to the emergency fund and $469.67 in additional debt payments. Of the additional payments of $469.67, $103.75 should go toward paying off the balance of credit card A since it has the higher interest rate and the lower balance. The athlete should apply the remaining $365.91 to credit card B. Table 4 carries this logic through until the athlete pays of both credit cards in January. At that point, the athlete should transfer all $1,666.67 of the savings allocation to the emergency fund resulting in an ending balance of $11,014.29 at the end of August – just prior to the start of the next season. Table 5 presents the balance in the Emergency Savings fund throughout the contract year. However, this athlete should strive to build up an emergency fund that will cover at least six months’ worth of Needs. This amounts to $25,000 in the current scenario, which would take eight months to accumulate under the current scenario. At that time, the athlete can begin to focus on wealth building with regard to retirement savings, real estate investment related to a personal residence, and saving for other long-term personal goals.

Table 4

Table 5

This paper describes a system whereby a student-athlete transitioning to professional sports can allocate his or her contract income to enable him or her to live comfortably, save for the off-season and save for emergencies. This system requires two savings accounts, a checking account, and cash for everyday purchases. This paper describes a scenario where an athlete earns $100,000 in his or her first season payable in 10 monthly installments. Using a 50/30/20 spending allocation to wants, needs, and savings, this athlete will have over $4,000 per month to cover housing, transportation, groceries and other necessities, $2,500 per month ($575 per week for spending money) and $1,666.67 per month for debt repayment and savings. Further, the athlete can retire over $7,000 in debt during the contract year and save another $11,000 for emergencies. The key calculations for this sample case are summarized in Table 6.

Table 6

Proper planning is essential to financial success. This is especially true when your income is unpredictable. This paper outlines a method to plan and monitor your money throughout your career. This method addresses needs, wants, and both short-term and long-term savings including debt repayment.

By following a spending plan and living within your means, you can defy the odds and live comfortably. The key is developing an adequate spending plan. This paper provides a framework for such that a student athlete can use when transitioning to professional sports. This paper presents a worksheet in Table 7 that you can use to create your own financial plan using our sample case as a guide. The sooner you learn and embrace sound financial management practices, the sooner you can realize your financial dreams and avoid the financial ruin that derails so many professional athletes.

Table 7

I appreciate the helpful assistance of Steve Mitchell in developing this manuscript.

1. Economic News Release. (2017, September 1). Retrieved from Bureau of Labor Statistics:
2. Huddleston, C. (2016, September 19). 69% of Americans Have Less than $1,000 in Savings. Retrieved from
3. Ramsey, D. (2013). The Total Money Makeover: A Proven Plan for Financial Fitness. Nashville: Ramsey Press.
4. Warren, E., & Tyagi, A. W. (2006). All Your Worth: The Ultimate Lifetime Money Plan. New York: Free Press.
5. Washington, P. C. (2013, January 6). Meet the Woman Behind the 52 Week Savings Challenge. Black Enterprise.

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