What is something you wish you learned in school but never did? One of the most common responses that people give to this question is personal finance skills. Combine this deficit with an extremely challenging environment for handling finances properly like the poker ecosystem and the potential for major financial mistakes is quite high.
Why the Poker Ecosystem is Financially Challenging
What makes the poker environment so challenging for those who lack financial savvy? Everything from knowing which games to play to how much money to sit down with to when to quit a session, how to track results, and how to invest and pay taxes on profits and everything in between. It is generally a cut-throat environment where not only is there little guidance in these areas but there are people actively trying to harm you as well. Anybody who has ever lent money that was not paid back or was a victim of some other scam knows this experience viscerally. The remainder of this article will attempt to save you from three of the biggest financial mistakes that poker professionals and serious poker players make all too often.
Avoid These Three Poker Financial Mistakes Video:
3) Not Keeping Poker Finances Separate from Everyday Finances
Poker players who do not have a separate financial account for just their poker bankroll are putting themselves at risk of several things. For one, major life expenses come up frequently and unpredictably. If a poker player has all his money in one account, he will inevitably have to withdraw from that account when these expenses occur. This can sometimes put the player out of action, but more commonly, the player limps on with the feeling of a diminished bankroll and an unrealistic desire to win the money back right away to pay off the expense. It's almost as if he has suffered a bad beat that wasn't even poker-related, and now he is often tilted and mentally starting in a hole before even sitting down at a poker table. All of this can be avoided by setting aside a separate account for just poker that is not subject to the swings of everyday life.
It is also essential to keep good records for every session. This enables poker players to know where their profit and losses are coming from. Even a spreadsheet as simple as this will suffice:
Analyzing this data or turning it over to a poker coach can help produce insights about which venues are best to play in, what the ideal session length is, and whether a stop-loss should be implemented (and how large it should be). Any serious poker player needs to treat poker like a business, and if there aren't accurate financial records, that business is destined to fail.
2) Poor Bankroll Management
Here is one thing I have seen all too often while working with over 200 different poker students: Poker players dramatically overestimate their level of short-term control over their results. Several of them expect to win every time they sit down, and they believe their own efforts determine 70-80% of the outcome for that day. While I applaud the confidence and determination, this type of overconfident thinking can easily lead to poor bankroll management and game selection. Some players might look at a juicy game of eight other action players and decide to play even though they are not properly bankrolled for it and have not accounted for the downside risk of coolers, suckouts, and other forms of running bad. The reality is that on any one given day, almost anything can happen due to the role of variance. I would estimate that only 10-20% of the day's outcome is tied to a player's level of skill while the rest will be due to variance. This may sound small, but in the long-run, this repeating 10-20% piece that actually can be controlled produces substantial edges and profits. But a poker player never reaches the long run if they can't handle the financial swings and the difficult emotions that inevitably arise along the way.
It is essential to ask one question before pursuing poker seriously: "How much can I afford to lose on poker in a way that would not impact me in any significant way in the rest of my life?" Once that question is answered, it becomes easier to know what stakes are the maximum a person should play in. For example, if the answer was $20,000 for a live poker player, and because it is recommended to have a minimum of 20 buy-ins for live poker, that player should play a $1,000 buy-in game at most, like $2/5 NLHE. Online poker players need more like 50 buy-ins due to the greater swings and smaller edges inherent in online poker. But both types of players should adhere to a stop-loss: I have yet to meet a live poker student that is still playing their A-game after losing 3 buy-ins. Because of this, I recommend a 3 buy-in stoploss at a maximum, and for many students a 2 buy-in stop loss will be more appropriate, especially at 200 big blind buy-ins. No poker player should ever lose more than 10% of their bankroll in one right. Practicing this will give them a better chance of reaching the long-run and ensuring that no one night of negative variance can ever set them back too much.
1) Not Paying Taxes
At last, we come to one of the least talked about and least popular subjects among poker players, but also potentially the most important. Besides just the legal risks of not paying taxes, professional poker players that choose to keep their money "under the mattress" and who don't pay taxes are often not considering how much they are hurting themselves financially in the long-run. They think they have found a kind of societal loophole when in reality, even if they are never audited, they are still setting themselves back many years financially. This is because if taxes are not paid on profits, the profits are not able to be legally invested. This dooms the money to being eroded by the effects of inflation over time. In contrast, by paying taxes up front and investing the remaining profits, poker players can harness the power of compound interest and grow their money geometrically. One of the most important rules of personal finance is the rule of 72. It states:
Rule of 72: Divide 72 by the investment rate of return = Number of Years to Double the Money
So if someone invests $100,000 in profits in a 7% returning investment vehicle, that money will take roughly 10 years, or 72/7 to double to 200,000. In 10 more years after that, the money will become 400,000. Consider an example where a poker professional had a $143,000 profit year and paid 25% to federal taxes and 5% to state taxes, leaving $100,000 to be invested and make the mentioned return. Meanwhile, a player that chose not to pay taxes and kept the $143,000 under a mattress long term would fall behind by year 6 and would have no chance of catching up after that.
In addition to missing out on investment returns, by not paying taxes, professional poker players will have an impossible time purchasing a home if they want to get approved for a mortgage. Most mortgage lenders look for 3-5 years of consistent, reported profits, and part of demonstrating this as a poker professional involves providing tax returns. If one hasn't been reporting their profits all along, they will often miss out on home ownership which is one of the most reliable ways to build wealth over time.
Top Poker Financial Lesson to Take Away
If I could leave you with one thing, it would be this: Do not be the poker player who focuses all your time and effort on perfecting the technical side of the game, only to blow your profits with major financial blunders. By having a separate poker bank account, keeping good financial records, practicing strong bankroll management, and paying your taxes while investing profits, you will be well-positioned to maximize your poker success and make it to the long-run no matter what this crazy game may throw at you.
If you are struggling with managing your poker finances, or are looking to benefit more from your poker experience, contact Joel Wald today at joel@pto-poker.com or book a free 30-minute Zoom call to discuss how PTO Poker can help you achieve your poker goals!
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