One of the more interesting things to come out of the NHL lockout of 2004-05 was the owners’ insistence on a salary cap. Without getting too far into the details, basically a team can only spend up to a certain amount on player salaries for the year. There is also a cap that says any one player’s salary cannot exceed a certain percentage of the salary cap. (currently sitting at around 1/6th of the total cap value) What can the business of hockey teach us about personal finance?
1. Bad decisions will come back to haunt you: Just about every NHL team has a bad contract or two. When a team has limited resources, every dollar must be spent wisely. Not only does a bad contract have a financial impact, it also affects a team’s ability to take on additional salary. The same principles apply to your finances. You have limited resources that must be used wisely.
2. Don’t spend like a drunken sailor: Every year on July 1st, the NHL free agency market officially opens. Every team has lost players and is looking to fill holes. And inevitably, every year there are a few contracts that makes a fan go hmm. Obviously some general manager got caught up overbidding on the player that fills his team’s needs. Controlling your spending is important in both the NHL and your finances.
3. Having a buffer gives you flexibility: A team who has spent right up to the salary cap doesn’t have flexibility as the season moves forward. If they lose a player to injury, a team with cap space can trade prospects to get a decent replacement player. If a team doesn’t have cap space, they either have to trade a decent salary or call up an inferior player from the minors. It’s the same thing in personal finance. If you have a buffer then life’s problems become a whole lot easier to deal with.
4. Finding cheaper inputs give you more options: The Detroit Red Wings have been one of the most successful teams in the last few years. General Manager Ken Holland has an interesting opinion on goaltending. He won’t waste precious salary cap space on goaltending unless he can get a top 5 goalie. Holland’s philosophy is to simply find 2 or 3 decent goaltenders and hopefully one emerges as a legitimate starter. Spending less on goaltending gives the Wings more money to spend on the rest of the team. Similar changes can be made in your financial life.
5. Investing for the future is important: Draft picks have never been more valued by NHL teams. A good young player is able to produce at a higher level as his pay would dictate because he hasn’t amassed enough service time to be eligible for free agency. Investing for the future is just as important in your financial life.
So there you go. The next time you watch hockey, just think about the parallels that NHL hockey has to your own life.