Aug 16, 2024
If the average American had a $1 million dollar windfall, how might they spend that money in a single day? After all, it’s nearly 13 times greater than the median U.S. household income, according to the Federal Reserve.
For NBA legend Shaquille O'Neal, it was as if he had a wish list ready to go before the money even hit his bank account.
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During a guest stint on an episode of the financial literacy podcast, Earn Your Leisure, Shaq revealed how he’d once depleted his bank account on luxury purchases because he wasn’t aware some of his earnings were earmarked for taxes.
“I don’t know no motherf–king FICA. They took [something like] $200,000!” he recalled thinking at the time.
Here’s how the experience shaped Shaq’s perspective on money and wealth-building.
Money blindspots
In 1999, Nobel Prize-winning behavioral economist Richard Thaler of the University of Chicago developed the concept of “mental accounting” which he described as “cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities.”
In other words, people create mental baskets for different sources of income and earmark this money for different types of spending activities.
This irrational system of mental accounting can lead to bad financial outcomes, including the “windfall effect” where a sudden influx of cash is treated less seriously than regular income.
This windfall bias could be the reason why Shaq splurged on his seven-figure paycheck faster than he’d anticipated.
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“My agent called me and said, ‘Hey, I got a check for a million,’” he recalled. “You know me, I already had that black Mercedes lined up.”
After purchasing the luxury car for $150,000, Shaq was talked into buying two more — one for each of his parents. He also added some jewelry and suits to his growing bill that day.
Shaq’s mental accounting led him to believe he had plenty of money left over. “I get a call from the bank manager and he says, ‘you spent a million dollars,’ [and] I said, ‘No, I didn’t.’”
However, after looking through his statements, Shaq realized a significant chunk of his paycheck had gone to payroll taxes under the Federal Insurance Contributions Act (FICA).
“I had no idea what FICA, and income, state tax, sales tax [were],” he confessed. “So then I said, ‘Okay, I don’t want to be like the rest of these NBA players, I got to teach myself.’”
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It's unclear how much Shaq actually lost to FICA taxes. The former pro doesn't say when he went on his shopping spree, but in 2024, FICA taxes equal to 15.3% of your pay — 7.65% comes off your pay, while your employer is responsible for ponying up the other 7.65%. Self-employed people are on the hook for the entire 15.3%.
With this fresh perspective, Shaq diligently saved his paychecks, made savvy investments in diversified business ventures and built a fortune that is now worth roughly $500 million, according to CelebrityNetWorth.
A similar shift in mindset could help the average savers and investors too.
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Better budgeting
According to the 2023 BMO Real Financial Progress Index, 68% of Americans have no written financial plan in place.
Without a concrete plan, many may find themselves relying on mental accounting to manage their expenses.
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For instance, 67% of taxpayers expect to receive a tax refund in 2024, and nearly 30% of them plan to spend that money on activities such as vacations, home improvements, and retail splurges, according to Bankrate.
This means an unexpectedly large tax refund could be used for conspicuous consumption by many Americans, as opposed to saving and investing.
By planning ahead, you can optimize your finances and prepare for unexpected windfalls and expenses.
A savvy financial adviser can help you optimize further by helping you file your taxes earlier, estimate how much you might owe (or receive), and figure out where you can invest excess cash flow from various sources to meet your financial goals as early as possible.
When it comes to long-term financial planning, ditch the mental math and fire up a spreadsheet instead.
Update — Aug. 16, 2024: This story now clarifies that it's unclear exactly how much Shaquille O'Neal lost solely to FICA taxes.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
