Shohei Ohtani's Monumental $700 Million Contract: A Lesson In Deferred Revenue And Long Term Thinking

We will discuss this historic contract and how parents can use it to teach your kids about money and life

🚀 What’s happening: Have you heard the exciting news about Shohei Ohtani and his groundbreaking $700 million contract with the Dodgers?

It's making waves not just in the baseball world but also in the realm of financial strategy, particularly with the way it's structured around deferred revenue.

Break it down.

Ohtani's contract isn't your typical paycheck. It's designed to pay him over an extended period (20 years), meaning he won't receive the entire $700 million upfront.

The actual length of the contract is 10 years, where he will get paid $2 million per year. Then once the contract expires he will earn $68 million a year for the following 10 years deferring most of his earnings into the future.

But why the deferred payments?

Well, this unique contract structure benefits both the team and the player. For Ohtani, it's a significant win because it ensures a steady and substantial income stream over the long term while also allowing the Dodgers to skirt baseball salary cap rules and continue to build a powerful roster around him.

By using this tactic, the full amount of the contract does not have to sit on the Dodgers payroll, allowing them to still go out and buy other players because technically they aren’t spending as much today.

But how?

This financial concept is known as the time value of money and it’s super important.

What's the time value of money, you ask? It's the idea that a dollar in the future is not worth as much as a dollar today (think about it, due to inflation, a dollar just a few years ago could buy more stuff than it does today. That’s the time value of money at work).

By deferring payments, Ohtani is taking a personal risk that the dollars he'll receive tomorrow won’t be worth as much as they are today, but he is making the bet that if he is able to preform and build a strong team around him he will likely be able to earn more in sponsorships and get more opportunities because of the winning environment created by the Dodgers.

👪 Closer to home: But how does this relate to everyday life, especially when talking to our kids about jobs and careers? Well, it's like planting seeds for a fruitful garden. Sometimes, taking a job that pays less today but offers valuable experience and learning opportunities could set someone up for greater success in the long run.

Our kids might encounter situations where they're faced with choosing between a job that pays well immediately or one that offers less money but more room for growth and learning. It's essential to explain to them the concept of delayed gratification and how investing in their skills and knowledge early on can pay off in the future.

Encouraging our kids to think about the long-term benefits of their career choices, just like Ohtani is doing with his contract, can empower them to make informed decisions that might lead to greater success and fulfillment down the road.

So, as we cheer on Shohei Ohtani and marvel at his historic contract, we can also use it as a teaching moment for our children, highlighting the importance of balancing immediate gains with future opportunities, ultimately setting the stage for a brighter tomorrow.

Sign up for our newsletter below and get the latest financial news that matters to your family