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    Managing The Cap

    Don Shaughnessy

    Cowboys owner Jerry Jones: “Free-agency busts hindered Super Bowl chances”

    Jerry’s problem is just like yours. Previous commitments limit your ability to accomplish what you would like in the future.

    The headline was atop a recent Sports Illustrated story. NFL teams, like the Dallas Cowboys, are subject to a salary cap. If a high salary player does not perform up to expectations their salary still counts and there is less money for other players that might contribute. It limits flexibility and the chance to improve. Poorly managed salary cap issues have doomed the success of more than one team.

    The effect is exactly the same in your household. Everyone has a budget cap. If you exceed it, you will be punished. Maybe not immediately, but soon. You reduce your flexibility and your ability to control your future when your cap space is used up by previous commitments that no longer contribute value.

    Things like credit card payments for clothes or vacations or furniture. There is also the extra amount you pay to lease a high-end car instead of something more modest. Same with bigger mortgage payments on a bigger house.

    When you commit to make payments in the future, you have committed part of your budget cap and that amount is no longer available for anything else. If people made explicit statements about how that worked there would be fewer problems. Something like, “If I spend this extra $400 a month for this car that I like instead of the one that would serve well, I will need to give up golf club fees to make it work.”

    The more likely response is to borrow more to make the payments or to save less. Either way you are paying for the present with future dollars. Someday the future will appear and there will be too little money to pay for things that matter.

    It is the old story. You can only spend a given dollar once. If you commit future dollars to payments, they are spent today even though they may not come out of your bank account for a while.

    jerry-jones-1024x856Financial planning is about balancing the present with the future. Part of the present is paying for the past. Balancing is not an easy task and it is one that requires great discipline.

    Just like Jerry Jones, though, you cannot have control of your future if you commit to things that should not have been part of your life. Flexibility is an important asset. Do not give it up easily.

    Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

    The MONEY® Network