Coach Calipari Dishes Out Financial Advice

The other night on ESPN there was a "town hall" with among other people John Calipari who is the basketball coach at the University of Kentucky. Coach Cal is a master recruiter and over the years has been glad to take kids in knowing they would only be there one year before going on to the NBA. As a result he has had more exposure to future NBA players than most other college coaches.

At one point in the town hall the conversation turned to personal finances for the players and Coach Cal seems to feel an obligation to try to teach the players about some basics of how to handle their money. He says that the first $1 million should go into the bank and not be touched. After that you take care of whoever needs to be taken care of (family-wise). Back to that first million, he said if you leave it alone, then in seven years you have $2 million.

He then went on to say that with that $2 million you can live on $200,000 without ever touching the principal. First I think he is to be commended for being aware of these issues and trying to pass along awareness to his players.

It would better though if actually knew a little more about this before telling young people over whom he has lifelong influence how to manage their money. He obviously assumes perpetual 10% return and that a 10% withdrawal rate is safe. I do like the idea that these kids should sock away their first million... or more.

Moving out a little, one element embedded into Calipari's comments is over confidence of how numbers work, assumptions about the smoothness of returns and failure to recognize that in life there are occasionally financial events (this can refer to good things too) that compromise the potential success of any financial plan.

Quite frankly the number of things that can go wrong are endless. How many stories of personal financial failure have you heard in your life? While I won't go into to detail I have disclosed my parents made some catastrophic (related to personal finance) mistakes and while part of their story is familiar there are other dynamics that are unique to them, well at least somewhat unique. People can get done in by bad luck, illness, unfortunate timing (like maybe some who retired in 2000), family circumstance and on and on.

I think that the number of things that can go right is far fewer than what can go wrong and while I've never articulated it this way before I think focusing on the types of things that can go right, figuring out what those are and then giving yourself the best chance to benefit from what can go right.

Obviously I am going to say that things you can control that can go right include savings rate, living below your means, some sort of earned income in a post "retirement" career and respect for how numbers work. Someone who takes a 7% withdrawal rate could easily cruise on through without any financial problems but is does show a lack of respect, in a manner of speaking, of how these numbers tend to work. The more you take out the less chance for having your financial plan succeed so really this is about probabilities as it is possible for a 2% withdrawal rate to fail.

To the extent that there is no limit to the different ways that financial plans fail, the 2011 Dakar Rally (the big trucks are my favorite) ended over the weekend and less than half of the over 400 entrants finished the race.

How many different stories of failure do you suppose there were at the Dakar?