Financial lessons from football

As the new football season kicks off, we look to see if the beautiful game can teach us any useful financial lessons.

Football finance is bonkers. 

For the 2009/10 season, Premier League clubs spent 67% of their total revenue on wages. Of course, that’s only an average – Chelsea spent 84% of revenue on wages whilst Manchester City spent an eye-watering 107%. Spending at this level is nuts!

But even though football finance is bonkers, it’s also fascinating. I think it offers some lessons for most of us. So here’s a rundown of my five favourite football finance lessons:

Take your time before you invest

Alex Ferguson has made some very shrewd purchases in his time at Manchester United. One of his best was his  acquisition of Javier Hernandez in 2010. The Mexican striker has scored 20 goals last season, yet United picked him up for just £7 million. He’s now worth at least £20 million.

United had tracked the player for some time and sent a scout out to Mexico for a month before the decision to buy was made.

However, Fergie doesn't get it right every time. His purchase of Portuguese player, Bebe, looks less shrewed. Manchester United paid £7.4 million for the striker even though Ferguson hadn’t even seen a video of the player before the deal was done. Bebe has proved to be a big disappointment and he's now been lent to another club.

Ferguson made two classic mistakes when he did the Bebe deal. He relied on the advice of a former colleague without doing any research himself. And he also allowed himself to be panicked into a quick decision. That was because there was speculation that other clubs were on the verge of snapping up Bebe - a player who supposedly had the potential to become a star.

So what are the lessons for us ordinary mortals?

If you’re thinking of investing in the stock market, or starting up a pension, there’s no need to rush. Don’t rely on the advice of a mate or a colleague. Instead take your time, do your research and only invest your cash when you feel confident that you’re making the right move.

Be careful with your pension

Until 2006, football players were allowed to access their pension pots aged 35, way earlier than the rest of us. What’s more, they didn’t have to use their pension fund to secure an income. They could spend it on whatever they liked.

Paul Merson, the former Arsenal footballer, was able to access an £800,000 pension pot on his 35th birthday and promptly blew it gambling. Nuts! Sad too....

Now ordinary folk can’t access their pension pots until they’re 55 at the earliest, and even then, they can only withdraw 25% of the pot as a tax-free lump sum. But there’s still a lesson to be learned here.

It’s essential that you think very carefully before withdrawing any cash from your pension pot. Life expectancy is growing all the time and you may well need the money to fund a spell in a care home before you die. If you do decide to withdraw a lump sum, make sure you use it wisely. Don’t fritter it away like Merson!

Don’t borrow too much

Leeds United was a football club on the way up in 1999, but then its board got carried away and borrowed too much to buy new players. The club could only make the numbers add up if it qualified for the Champions League every year which sadly didn’t happen. As a result, the club was in deep financial trouble by 2004.

The Leeds board was happy to borrow because it believed that the value of players it bought would carry on rising, but just as with Florida property, that didn’t always happen. The board was also seduced by a new financial instrument for football – sale and leaseback deals.

Of course, borrowing can make sense if you want to buy a home or start a new business. But never assume that the value of your asset will always rise in a nice smooth line. And don’t get too excited by new loan products from the banks. If you borrow too much, you’re very vulnerable if things start to go wrong.

Income matters more than capital

Whenever a club spends lots of money on players in the transfer market, there’s a lot of coverage in the sports pages. However, it looks like transfer spending isn’t as important as you might think. Research in a book called Soccernomics suggests that player wages are a much better predictor of club success than spending on transfers:

“In fact, the amount that almost any club spends on transfer fees bears little relation to where it finishes in the league. We studied the spending of forty English clubs between 1978 and 1997, and found that their outlay on transfers explained only 16 per cent of their total variation in league position.”

I think there’s a parallel here with stock market investment. When you read articles on the stock market, they normally focus on share prices – which stocks went up, which went down. It’s easy to think that the way to make money from the stock market is to focus on rising share prices.

But, in reality, two thirds of the return for stock market investors comes from dividends – the regular income that most companies pay out. So just as sports pundits should focus more on player wages, investors should focus more on dividends. Picking shares that pay a good dividend can be a great way to build wealth for the long-term.

Know how much you're spending

Whilst doing some research for this article, I came across this stunning quote from Spurs Manager, Harry Rednapp:

"I haven't got a clue what a single player at this club earns."

That's gobsmacking! How can any business be financially successful if the boss doesn't know how much he's spending?

Still, I can't be too sanctimonius about this. I didn't monitor my spending when I was younger and wasted too much money as a result.  I'd go down with the pub with no budget, and I'd have little idea how much I'd spent when my drunken head hit the pillow afterwards.

Once I started to track where my cash was going, I became more careful with my money and richer as a result. If you want to keep an eye on where your money is going, check out lovemoney.com's funky Tracker tool.

So that's the lowdown on my five favourite football financial lessons. I hope you found them useful.

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