Jack Johnson is an NHL hockey player who makes $5 million a year. Jack Johnson recently filed for bankruptcy.
How someone with that kind of earning power could go broke is a cautionary tale on many levels. Unfortunately, tales of retired athletes going broke are all too common, but what is striking about Johnson's story is that he has gone bankrupt while in the midst of a lucrative contract. Worse still, he has his parents to blame.
Apparently Johnson, a defenseman with the Columbus Blue Jackets, gave his parents power of attorney to conduct his financial affairs. They borrowed heavily against his future earnings, a practice sometimes known as "monetizing" a contract. Basically, this means getting money upfront with the subsequent contract payments used to pay back the advance.
The problem is, his parents committed Johnson to pay ridiculously high interest rates, and obviously overextended his resources. His bankruptcy filing claims assets of $50,000 and debts of $10 million.
High income, hard lessons
Numbers that extreme suggest there is something beyond mismanagement at work here, but whether his parents were crooked or simply incompetent, there are some fundamental lessons to be taken from this unfortunate example.
1. Limit the authorization you give. Granting full power of attorney is a dangerous thing. Let people advise you, and possibly make investments on your behalf, but when it comes to borrowing or transferring money, you should retain sole approval for yourself.
2. Trust is no excuse for inattention. Most people don't expect to be cheated by their parents, which may or may not be what happened here. However, when it comes to money, you don't have to worry as much about who to trust if you make it a practice to keep a close eye on things yourself.
3. Family and finance often make a poor mixture. Athletes and entertainers who strike it rich often hire family members in some capacity. It's one thing to put them on the payroll, but it's another to give them responsibilities for which they are not qualified. Assuming no one else hired Johnson's parents to manage their money, you have to wonder why he thought it was a good idea.
4. You are never too young to start long-term planning. An athlete in his prime may not spend much time thinking about growing older, but everybody needs to think long-term about how to make their financial resources last. Otherwise, how do you know how much you can afford to spend, and how much you need to save?
5. Borrowing today often means cheating yourself tomorrow. While Johnson's is an extreme case, to some extent many Americans do the same thing he did. Rather than live within their means, they borrow to support immediate spending, without recognizing that this will just sap their standard of living in the future.
6. You should only have to get rich once. A multiyear contract at $5 million a year is beyond the dreams of most Americans. If you should be so lucky as to obtain that kind of money, you have already won. There's no need to get cute with financial tricks and risky investments when you already have all the money you should need.
There are plenty of things that can go wrong with your finances even when you make sound decisions. Don't compound that risk by making foolish mistakes.
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