So you want to figure out your household budget, but all these numbers are either too confusing or make you feel too restricted. You work hard for your money, and you want to spend it on whatever you want. I don’t blame you, you don’t want managing the money you work for to seem like a such a job in itself. If however you can find a way to be passionate about managing your finances, you can not only be better with your money; you can also have a bit of fun managing your household salary cap.
Take the concept of the NHL salary cap. I love hockey, and what’s more I love the business of hockey. You can look at how a GM manages their salary cap much the same as you manage your household budget. First of all – you need to figure out if you are a cap team or a real money team. Fair warning – I may sports nerd out a little bit here.
If you have enough money coming in that you can take care of your expenses and make a long term plan of how you are going to spend or save your extra money over the next few years, you are a cap team. That means that you can divvy out a portion of your money to cover your short term bills and use the rest to plan out the average annual cost of your long term goals. Let’s say your team makes 100 million dollars a year, and you have a salary cap at 72 million with a payroll sitting at 62 million. That leaves you 10 million in cap space within your budget plus an additional 28 million in available funds. You now have the freedom to spend a bit more real money upfront as long as the AAV doesn’t exceed 10 million a year. If you want to land a star player, you may need more money upfront to pad their pockets while they are still young, or for signing bonuses – but you still need to keep an eye on the costs over the contract so you don’t exceed the salary cap. The simplest way to translate this into your financial world is to consider home ownership. If you want to own real estate, you need some cash up front for down payments, closing costs, moving costs (I’m sure we’ll do a post on this at some point so I won’t continue this list now). You can look at your housing costs over a period of say five years, incorporating those upfront costs into the average of your total budget. $100,000 now and $20,000 per year afterwards only translates into $36,000 a year over a five year period. Having that $100,000 available now is the difference between a mortgage and a tenant agreement.
REAL MONEY TEAM
Most of us don’t have the luxury of spending to the salary cap, we are budget teams that have to keep an eye on our expenses for the year to make sure that you aren’t overspending. Borrowing from the “CAP TEAM” example above, let’s look at a team that only pulls in only 75 million a year but with the same cap number and same payroll. They can still cover the bills, but only have an extra 3 million in spare cash to spend up front so having 10 million in cap space doesn’t afford them the same luxury of being able to front load a contract to attract a free agent. That isn’t to say you can’t have any good players – but when you pick up a player, maybe go for one in the middle of a contract where the big up-front salary has been paid out by another team, but the salary cap hit is the same (buy it used). Another option would be develop from within, taking full advantage of your entry level contracts and developing the stars of tomorrow (savings and investments). The big money players don’t always come through either – as a Toronto boy I am a die hard Leaf fan, definitely a cap team where real money is virtually no object. Even with a near bottomless pit of cash, we have not been able to win the Stanley Cup in half a century and counting – it isn’t always about how much you have, it is what you can generate with what you do have.
I know the example isn’t perfect, there are nuances to the salary cap that are way too hockey specific to apply to your household budget. My point is that working your budget doesn’t have to be a downer, whether you are a cap team or a real money team you can take control of your finances and look forward to taking home the cup. Look at your budget like you would your NHL payroll – sinking the most money into things that make your team better: A 1st line center (your home), a top pairing defenseman (your life – food, clothing, etc) and your last line of defence – a great goalie (retirement savings). It is definitely possible to make these 3 your focus, if you are a team on a real money budget it may take some creativity and focus but you can succeed if you take control of your goals.
I will leave you with one of the most well-known hockey quotes “You miss 100 percent of the shots you never take” – Wayne Gretzky
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