Case Study: Dissecting Tiger Woods Masters Victory Earnings
*This case study is in collaboration with Finch Financial. Finch Financial is a financial education platform designed to empower individuals to achieve financial freedom. This study is meant to give a look into the potential decisions and scenarios athletes may face with their financial playbooks.
Tiger Wood’s triumphant victory at the Master’s Tournament presents an opportunity to learn invaluable life lessons, from perseverance to wealth management. Tiger’s victory is a testament to his determination, resilience, and more importantly, ability to thrive in the face of adversity. After overcoming multiple back surgeries and injuries, Tiger became victorious and earned $2.07 million from his recent Masters win! Tiger’s last major championship victory was in 2008, more than 11 years ago.
Since his last Majors tournament, Tiger faced financial challenges by losing sponsorships. In fact, he lost $22 million in endorsements during 2012. Using Tiger Woods as an example, we can learn the importance of wealth planning and the importance of preparing for unexpected financial downturns. Tiger Woods financial situation was unique - he was wealthy. Although he lost $22 million in endorsements, he was still one of the wealthiest athletes of all time. However, this is a valuable lesson for other athletes who could have encountered a similar hardship. It's important for athletes to be prudent and frugal with money management.
If you’re an athlete and received $2.07 million, what options are available to you? Where do you put the money and how do you preserve it or make it grow? Should you invest in the stock market, save for an emergency, invest in a friend’s business, or continue to go about your life like it’s just another day? 2.07 million dollars is more than what some people make in their lifetime earnings and Tiger was able to make that over the course of 4 days.
In this case, let’s analyze two different scenarios: whether Tiger should invest his earnings into the stock market or use a high-interest savings vehicle (certificate of deposit).
Scenario A – Investing in U.S. Stocks
In the United States, the S&P 500 index is composed of the 500 largest U.S. companies based on their market values. This index is used as a proxy to gauge the overall health of the US economy. Furthermore, this index provides an opportunity for an investor to have their money invested across 500 different companies! It’s a powerful way to gain exposure to the most valuable companies in the U.S. Warren Buffet, iconic investor and multi-billionaire is a big advocate of the S&P500, usually advising new investors to invest in the index until they gain adequate knowledge of their intended financial strategy.
Historically, the S&P 500 has an average return of 7%, adjusting for inflation. Inflation is the rise in prices over time. With this in mind, assume that Tiger will invest $2.07 million into the S&P 500 index for the next ten years. At the end of ten years, the earnings would be worth $3,948,073!
Within the span of ten years, the earnings from the Master’s Tournament have almost doubled. This scenario demonstrates the value of investing and how it’s the cornerstone for wealth accumulation. There are a few caveats, however.
Investing is not risk-free. In this scenario, Tiger is taking a risk by investing money into the stock market. By taking a risk, he is assuming that his earnings will earn a higher return. During an investment period of ten years, there will be periods of positive and negative returns; it’s part of the investing experience. Nonetheless, this illustrates the importance of how investing earnings can make money work for you!
Scenario B – High-Interest Savings Account (CD)
In the first scenario, Tiger took a risk to invest his money to earn a higher return. On the other hand, a more conservative approach can be used by using a certificate of deposit (CD). A CD is a long-term savings account. These savings accounts offer a specified interest rate and time period for money to grow.
In this scenario, Tiger elects to purchase a CD that will earn 3.10% over ten years. At the end of ten years, the initial deposit will be worth $2,723,542. In comparison to scenario A, the earnings in this example are significantly lower. Why?
A savings account is a much more conservative approach. When Tiger is purchasing the CD, the interest rate is locked in. The expected return on this instrument can be calculated with a high degree of confidence. In this scenario, Tiger is not pursuing a significant amount of risk; therefore, he is not expecting an extraordinary return.
With a CD, there are some restrictions that Tiger must account for. There is an early penalty for withdrawing the money early. The total amount insured may not cover the whole deposit of $2.07 million dollars, therefore, it would be wise to spread his CD’s across multiple banks.
What’s the learning lesson?
HIGH RISK = HIGHER EXPECTED RETURNS
You can clearly see the difference between the two options. One option has higher returns, however, it's not a guarantee that Tiger will earn the projected returns (which is why we said expected). What if he invested during a downturn or needed to take his money out when his stock hasn’t fully vested? One option has higher returns, however, it's not a guarantee that Tiger will earn the projected returns.
With the CD, you have something locked in, but the return is very minimal compared to what you started with.
It’s important when considering any option with your money especially with a lump sum of earnings. Consider all the options relative to where you are currently at. For example, Tiger at age 30 may invest differently from Tiger at 43. Is he in a place financially where he can gamble a little bit in the S&P or does he want to make a safe play with a CD? Tiger who is one of only two athletes who’s worth a billion dollars may not even consider any of these options when it comes down to it...but for the purpose of this discussion, it’s important to see two options that one could consider.
My rookie year I received my signing bonus (nowhere near 2.07 million) and decided to do a CD for 12 months to give me time to learn how life as professional athlete worked and different financial basics in order to make solid decisions down the line. I was 18 at the time and wasn’t experienced enough to make a big money decision. This illustrates how every situation is unique but, it’s important to have an idea of different options.
Information presented here is to be used for informational purposes only. Said information does not constitute investment, accounting, legal, tax, financial, or similar professional advice and should not be used as a substitute for such advice or relied upon as such.
Please consult with your financial advisor, attorney, or other professional before making investment decisions.