Debt Management

I noticed this headline in Forbes on the 14th.

“Dallas Cowboys Among NFL Teams In Worst Cap Situation Heading Into Free Agency”

They are close to the maximum they can spend on salaries because of old commitments. Even if you are not a football fan there is a lesson for you. Commitments you can easily make today may turn out to be not easy some day in the future.  Debt is a common one, but there are others.

Every commitment you make today has a price in the future.  Every contract The Cowboys sign must be fulfilled in the future. A salary commitment becomes a line on a salary schedule and it has numbers that show up years into the future. You do the same thing when you incur a loan. You have explicitly committed some of your future income to satisfying the contract you create now.

The pain to fulfill it in the future may be greater than you anticipate. The future is not as clear as people expect. Change happens. Debts that seem easy enough now rely on certain assumptions about future income.  Those assumptions are not facts.

The defense is easy enough.  Start with knowing what the debt means.  It means two things.  1) You can have the nice house or car now, and 2) you will have less disposable income for quite some time in the future. You should think about the debt by imagining yourself in the future and looking back to the moment you incurred it.  What would you see?

You should see an important distinction. Borrowing is about getting money.  Paying back is about earning money. One is easier than the other.

If the asset you are financing does not pay its own way in cost savings or income, be cautious. Debt management works best if it is practiced before the debt is incurred. Do not borrow close to the most you can borrow. Create a little flexibility in your future. Understand how the distant future will unwind.

Remember the distant elephants. They become very large as they get closer.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

One Comment on “Debt Management

  1. Well said as always this is the lesson that we teach and preach to our clients on a daily basis.We find it very challenging to change the status quo as even the companies punish those that have no line of debts when buying or trying to acquire or purchase any reasonable asset.Your worth is calculated and assessed based on the debt on your profile and it has become a norm to have some form of credit in order to fit in.Most of this debt is unsecured a disaster in waiting should anything happen to that person.Maybe we need to emphasize the earning versus getting money theory that you teach us.I will rather live in shack in peace than in a mansion with a pile of debt and no planning around it.Thank you Don this might have the needed impact in South Africa our brothers are drowning in debt with no end in sight

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