Note: This post was originally written back in August 2016.
Lebron James signed two short term contracts with Cleveland Cavaliers since joining them back in 2014, each one with a one year player’s option to opt out. Signing such a short term contract allowed James to maximize his salary each year he plays – but at the same time he also left money on the table by not signing a longer term contract. Kevin Durant also left probably north of $50 million in guarantee money on the table by signing a two year contract at a value of $54.5 million with a player opt out after one year.
What’s the deal with these players getting a smaller contract than lesser known and all around lesser players like Luol Deng and Hassan Whiteside. That is because the NBA will have a significant jump in salary cap space over the next two years and will also during that period negotiate a new more lucrative television contract. Additionally, the league or the players can opt out of the Collective Bargaining Agreement (CBA) which might happen later this year given the prospect of a significantly higher television revenue which could result in the players receiving yet a bigger cut of a larger revenue number. This can lead to substantially greater contracts in the future. Why lock yourself into a measly $30 million a year contract for the next 5 years when you can get $55 million a year by negotiating your long term contract next year or the year after.
James and Durant are doing this because they are smart enough to understand their value and to be able to bet on themselves. Now nothing is with certainty and the commissioner of the NBA just came out to argue that it might be better if those players sign longer term deals because of the guarantee nature of such a contract. The players’ production and numbers might decline or they might get injured which would lower their long term value if the injury is perceived to impact their long term performance. But why are the players able to place such big bets on themselves by foregoing a $150 million contract today for potentially a $200 million payday in a year or two from now.
You can’t blame them for being able to take advantage of their situations because they have spent years putting themselves in that situation. What we should do is try to follow what they have done right and, hopefully, one day, we will be in a position similar to theirs where we can also take advantage of a situation when it presents itself.
Demonstrate your Value
It’s easy to negotiate a max contract when you have demonstrated your value. James and Durant have both worked extremely hard to get to where they are and have, through years of performance, showed that they are able to be leaders of their teams and to be game changing players.
Save and Invest
James and Durant have both made significant money in salary in passed years as well as money from endorsements and investments. They are both very smart with their money which allows them to take the risk of foregoing a guarantee long term contract for even a better one in a year or two later.
Big Up Nest Egg
They have both built a net worth cushion and can afford to take a risk with not signing a longer term guaranteed contract for the prospect of chasing more dollars in a year or two. Given their savings, they do not need to worry about living paycheck to paycheck. They will still be fine financially even in the event they do get injured and will not get a chance to sign the $200 million contract. Yes, that would hurt them but, at the least, they won’t be broke or homeless.
Understand your Company’s Situation
James signed his short term contracts a couple of years ago. He was smart enough to understand the financial situation of the NBA and the agreements which govern player’s salary. From 2016 to 2017, the salary cap will increase about 50%, the CBA can be revisited and a new television contract will be agreed upon generating more revenue for the league. All these events will only lead to bigger player contracts. By understanding the league’s situation, James was able to plan accordingly in order to maximize his own financial position.
Access the Risk and Reward
James and Durant understand the risk but they are able to bet on themselves. I’m sure the reward to them is well worth the risk.
Make a Decision to Put Yourself in a Position to Win
They made the decision to assume the risk for a bigger play out in the future. You have to respect them for the ability to put themselves in that position.
Continue to Work Hard to Make It Happen
James and Durant cannot rest on their laurels. They have to continue to work hard, put up good numbers and help their teams win in order to be able to demand a max long term contract in a year or two. Therefore, they still need to continue to work hard each and every day to make the big pay out happen.
To the audience: Would you give up a long term guaranteed contract today for the potential for a bigger pay out tomorrow? What have you done to put yourself in a position to win if the opportunity presents itself? Comment below.
Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
You can read more about me here.
Thank you for visiting. Come again soon!
