The NCAA will no longer prohibit its athletes from making money off their name, image and likeness (NIL), and some are already cashing in. For example, incoming Tennessee State freshman basketball player Hercy Miller signed a deal with web design and coding company Web Apps America for $2 million over four years. It has long been a problem that college athletes — in fact almost all college students — aren’t offered enough personal finance education in school. And now with NIL it’s even more important than ever for college athletes to take control of their personal finances. For those looking to take advantage of this newfound sponsorship money, here are seven steps to focus on.
1. Know your credit score
Your credit score is an integral part of your financial life. Any form of a loan — whether car, home, business or personal — takes your credit score into consideration. The higher the score, the lower the interest rate. This amounts to less money out of your pocket over time.
Not only does your credit score impact the interest rate on a loan, but it’s also used to determine car insurance rates, and the terms you pay for things like the internet, cellphone service and cable bills. All in all, keeping a credit score above 700 will give you access to beneficial financial deals.
A few ways to raise your credit score include paying bills on time, using a low percentage of your available credit and avoiding too many hard inquiries, which are new applications for credit cards, car loans, mortgages and personal loans. A good way to keep an eye on your credit score is to request your credit reports, available for free on an annual basis through AnnualCreditReport.com. Currently, it is accessible on a weekly basis due to COVID-19.
2. Create a budget
One of the most important things you can do is execute a budget and set realistic goals. Budgets will show you where you’re spending your money, and it can help identify areas where you might need to cut back.
Adopting Elizabeth Warren’s 50/30/20 rule, which is about splitting up your after-tax income, is a start. With this rule, 50% is devoted to needs, 30% on wants, and 20% to savings. Needs are bills that must be paid (e.g., rent, mortgage, car payments, insurance, health care and debt); wants are non-essential expenses, and savings include an emergency fund and money stashed away for retirement.
3. Establish an emergency fund
Establishing an emergency fund is necessary during tough economic times in case you lose a source of revenue or have unexpected expenses — such as a vehicle in need of repair or medical bills. Keep your emergency fund somewhere where you won’t be tempted to spend it.
An emergency fund that can cover 6-12 months of expenses is a good start, but ideally having 12-15 months’ worth of expenses is better, to avoid any additional financial strain in times of a slower job economy.
4. Pay down debt
Paying down debt in general — such as credit card, cash advances or other loans — is a great way to use the money. If you have student loans, make sure to assess whether accelerating student loan repayment versus saving is the right way to go. An important thing to know is the difference between simple interest and amortized interest.
Simple interest loans (e.g., credit cards) are typically shorter-term, but with a higher interest rate.
Amortized loans (e.g., student loans) are typically longer-term, have a lower interest rate and lower payments but can potentially cost you more in interest over a period of time. This is due to the amortization schedule, which dictates how principal and interest are applied. At the beginning of the loan, you’re paying more interest. Toward the end of the loan, you’re paying substantially more principal than interest.
For people who have been paying off their student loan debt for several years, more is being applied to the principal versus the interest portion. But student loans often charge a lower rate than credit cards, so it’s important to evaluate what type of debt to pay off first.
5. Let compound interest work for you
Money deposited straight into your savings account isn’t being spent elsewhere and won’t necessarily be missed. It also helps you maintain discipline with your savings.
The Rule of 72 is a formula that will help you calculate how long it will take for your money to double. For instance, a 3% rate of return would take 24 years (72 ÷ 3 = 24) for $1 to double to $2, while a 6% rate of return would take 12 years (72 ÷ 6 = 12).
With traditional banks offering near-zero interest rates for checking, savings and money-market accounts, one of the few ways to double your money over a 12-year period is to invest in stocks, mutual funds and exchange-traded funds. With any investment, make sure to know your risk tolerance and time frame as losses will occur.
6. Make saving for retirement a priority
According to a survey conducted by the Employee Benefit Research Institute, less than half of Americans have tried to calculate how much they will need to save for retirement. Having a plan is crucial, especially while in college where contributions to your retirement savings accounts can grow with compounded interest and tax-free. The ideal savings rate would be about 10%-15% of your annual pay for retirement, but if that seems challenging, start small and work your way up, saving more each month.
As far as retirement accounts for college students, a Roth IRA is the way to go with the maximum contribution in 2021 at $6,000. The prerequisite for any retirement account is earned income. Basically, contributions are made with after-tax dollars, meaning they are not deductible from your income, and their earnings are tax-free upon withdrawal. Unlike a traditional IRA, there is no requirement to begin taking out minimum distributions at a specific age, but most retirement accounts are subject to a 10% early withdrawal penalty if you’re under the age of 59 ½.
Most tax rates are currently at all-time lows in the U.S. — at least until Dec. 31, 2025. Basically, you are foregoing a small deduction now for a larger tax-payback later.
7. Increase your financial literacy
The two investments that are crucial for college students include education and financial literacy. Take a class or do research online to gain financial skills and knowledge. Financial know-how is not something all college students have access to; therefore, motivation is needed to learn about it through books, articles or attending financial seminars.
Also see: MarketWatch’s How to Invest series
The more knowledge you have, the easier it will be to make solid, informed decisions. You will understand the different types of financial strategies and be able to engage in age-appropriate investment risk. Financial strategies based on tax-deferred earnings growth (or triple compounding) are great since they pay interest on the principal, interest on the interest and interest on the taxes you would pay if your investment income were taxed annually. The more time you have money in these long-term investments, the more your contributions — no matter how small — can add up to a sizable amount.
Don’t rely only on just an agent, business manager or financial advisor — or let anyone get in the way of you getting educated. I often speak with upcoming draft picks and am shocked at how many college athletes rely on people that don’t have their best interests in mind.
Carlos Dias Jr. is a financial advisor, public speaker, and founder of Dias Wealth, LLC, working with current and former professional athletes (including their agents), business owners, retirees, and executives nationwide.