Investing Your Entry Level Contract
A question that often comes up from parents and players is at what point should they begin investing. Does it make sense to wait until you’re actually playing in the league, or should you start as soon as you receive your first bonus? Although there isn’t a set-in-stone answer as it varies from player to player, a simple illustration might help us get an idea.
Let’s compare two players with identical careers:
- They signed their entry-level deals at 18 following the draft.
- Were rookies in the NHL at 20 and played out their Entry-Level Contracts.
- Their following contract was for two years
- They signed long-term contracts at 25.
The only difference between the two players is as follows:
Player #1 – Saves & invests $25,000 once he receives his first signing bonus and continues to do so every year until he signs his long-term deal. He then stops contributing and simply lets his investments grow.
Player #2 – Doesn’t save or invest any of his entry-level contract money. Instead, he waits until he signs his long-term deal. Starting at age 25, he invests $25,000 per year for the next 20 years.
Assuming all else being equal, no tax implications, and both players earn 8% per year on their investments, here’s how their accounts look at age 45:
*Tables above represent a hypothetical scenario with no tax implications and an 8% average return with no variability in returns year-over-year.
**Source: Adam Henry
The results are pretty staggering. The first player has only contributed $200,000 to his investment account, whereas the second has contributed $525,000, and their account balances are nearly the same! The above example represents the power of compounding, and it illustrates an essential concept:
- The most valuable asset when it comes to investing is time. If you’ve signed an entry-level contract at 18 years old, you have a good amount of capital, and time is on your side from an investment perspective.
We can see that the earlier you begin saving and investing, the better off you’ll be long-term. But perhaps more importantly, adopting good financial habits early on in your career can make a very drastic difference to your life after hockey. Consider the following:
- If the first player continues contributing $25,000 until age 45 instead of stopping at 25, his account will total over $2.5 million.
- Take it one step further. The first player has adopted a good habit of investing and sees how powerful it can be. Instead of $25,000, he begins investing $100,000 per year once he signs his long-term deal. In this example, his account will be worth several million by age 45.
- Finally, consider the possibility that at age 25 there is no long-term contract available, and your playing career abruptly ends. In this scenario, player one has built up a $250,000 cushion to help him transition out of the game, whereas player two is left with nothing.
My job is to help players develop these good habits and stick to them throughout their playing careers so that they can enjoy life after it.
Book a call below if you’d like to chat about your personal situation.