If the average American unexpectedly received a million dollars, what would they spend that money on in a single day? After all, according to the Federal Reserve, it’s almost 13 times more than the average household income in the United States.

For NBA legend Shaquille O’Neal, it was as if he had a wish list ready before the money even hit his bank account.

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During a guest appearance on an episode of the financial literacy podcast Earn Your Leisure, Shaq revealed that he once emptied his bank account on luxury purchases because he didn’t realize that a portion of his earnings were earmarked for tax withholding.

“I don’t know about damn FICA. They took (something like) $200,000!” he recalled thinking at the time.

This experience shaped Shaq’s view of money and wealth creation.

Blind spots in the financial sector

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 track financial activities.”

In other words, people mentally create a basket of different sources of income and reserve this money for different expenses.

This irrational system of mental accounting can lead to poor financial outcomes, including the “windfall effect,” where a sudden influx of money is taken less seriously than a regular income.

This bias toward unexpected gains may be why Shaq blew through his seven-figure paycheck faster than expected.

“My agent called me and said, ‘Hey, I have a check for a million,'” he recalled. “You know me, I had already got the black Mercedes.”

After purchasing the luxury car for $150,000, Shaq was persuaded to buy two more – one for each of his parents. That day, he also added jewelry and suits to his growing bill.

Shaq’s mental accounting led him to believe he had a lot of money left. “I got a call from the bank manager and he said, ‘You spent a million dollars,’ (and) I said, ‘No, I didn’t.'”

However, when Shaq looked through his bank statements, he realized that a significant portion of his salary had gone toward payroll taxes under the Federal Insurance Contributions Act (FICA).

The story continues

“I had no idea what FICA, income tax, state tax and sales tax were,” he admitted. “So I said, ‘Okay, I don’t want to be like the rest of these NBA players, I have to teach myself.'”

It is unclear how much Shaq actually lost in FICA taxes. The former professional does not say When He went on a shopping spree, but in 2024, FICA taxes are 15.3% of your salary – 7.65% is deducted from your paycheck, while your employer is responsible for the remaining 7.65%. Self-employed individuals must contribute the entire 15.3%.

With this new perspective, Shaq diligently saved his salary, made smart investments in diversified business ventures, and built a fortune that is now worth around $500 million, according to CelebrityNetWorth.

A similar change in mentality could also help the average saver and investor.

Read more: Car insurance premiums have risen to a staggering $2,150/year in the US – but you can be smarter. Here’s how you can save up to $820 per year in just a few minutes (100% free)

Better budgeting

According to the 2023 BMO Real Financial Progress Index, 68% of Americans do not have a written financial plan.

Without a concrete plan, many may rely on mental accounting to manage their expenses.

According to Bankrate, 67% of taxpayers expect a tax refund in 2024 and nearly 30% of them plan to spend the money on activities such as vacations, home improvements and shopping sprees.

This means that many Americans could use an unexpectedly large tax refund for conspicuous consumption rather than saving and investing.

By planning ahead, you can optimize your finances and prepare for unexpected revenue and expenses.

A savvy financial advisor can help you optimize further by helping you file your taxes earlier, estimate how much you might owe (or receive), and figure out where to invest excess cash flow from various sources to reach your financial goals as early as possible.

When it comes to long-term financial planning, skip mental math and use a spreadsheet instead.

Update – August 16, 2024: This story now makes it clear that it is not exactly clear how much Shaquille O’Neal lost on FICA taxes alone.

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This article is for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.