Seed Money
Posted by John Draper | Filed under Economics 101, Money Management
Have you ever hear the term “seed money”? Know where it comes from? In the farming world, you always had to hold back a certain number of “seeds” to start your next-year’s crop.
Imagine that you’re a farmer and have decided to grow corn. At the end of the season, you grind and eat all the corn you’ve grown. How will you start your next year’s crop? So you set aside some of your corn to use as seed to get your crop started after the winter. And you set aside a little more of your corn to take care of whatever other crap hits the side of the barn.
If each year you found a way to plant enough corn to live comfortably and start your next year’s crop, you would have reached what economist call a “state of equilibrium.”
Suppose that in spring, after you had planted all your seed, a hail storm hit just as your corn was coming up, ruining your crop. You could starve, or you could go and borrow seed from another farmer. Or you could have had some extra corn set aside just in case.
If you did have that extra seed at the ready, you would have been prepared for the emergency. And if you planted a little extra corn each year, saving a little more seed each harvest, and increasing your production over time, you’d be growing your assets.
Without an emergency seed supply, you would have to borrow seed or starve. The farmer down the road might be very willing to lend you 100 seeds with the agreement that when you harvested, you would return 130 seeds to him, since he couldn’t plant those seeds to increase his own crop. See how interest works?
Now you’d have to pray that you could make do on the crop you bring in, less the 30% you have to give to the other farmer for lending you seed. Or you have to find a way to make your crop produce a higher yield so that you offset the cost of borrowing. Complicated, isn’t it?
Imagine that instead of saving some of the seeds from your next crop, you decided to sell the whole shebang because you wanted to buy a shiny new truck. Without seed money to start your next crop, you’d be back to borrowing and paying interest. Course the truck’s not quite so shiny, but you’re still out-of-pocket all the seed you spent. Hmmm.
Even with the vast improvements in fertilizer and pest control, you just can’t bring in enough crop to pay back the seed and live through until the next harvest. So instead of borrowing 100 seeds, you borrow 200. Now you must return 60 seeds to your friendly farmer, putting you even further behind the interest harvester. I guess borrowing to pay off debt just doesn’t work, huh?
Of course, you could just cut your current consumption so that you could not only have the seed you needed to repay the friendly farmer, but set aside your own seed for the next crop. So, out of what you harvested from the borrowed 100 seeds, you’d have to give your friendly farmer 30%, and set aside an additional 30% for your own future, leaving you with a measly 40% to live on for the year! Yes, that might mean going without a lot of things, even some basic things, but it would set you straight. That might be the smart thing to do.
Of course, if the townsfolk convinced you that there’s no way they’d ever let your farm fail because they needed your corn and would also keep you in business, you might be convinced to take their bailout plan and continue consuming the products and services they were offering to keep them in business. Sound familiar?
But when your next crop came in, as did all the crops from the surrounding farms, and there was way more corn than the town’s people could eat, you might find them unwilling to pay the amount for your corn that you’d been banking on. Ooops. So now you have a surplus of seed, but no money to buy the other things you need like meat and ale. Guess your back to cutting back.
The principals for money management are simple. If you have 100 seeds and you use up 100 seeds for whatever reason, you’ll have nothing. If you have nothing, then you’re going to have to borrow to move forward. If you borrow, you’re going to have to pay to use someone else’s seed. And that’ll cut into how much seed you can keep. Or you can go to work for another farmer, busting your butt 18 hours a day to do two jobs, and finally re-establish a state of equilibrium.
Of course, if you want to have some seed for when you don’t have the poop to work that hard anymore, equilibrium won’t be enough. You’ll need to set aside extra for those latter years, or plan to die in the field.
The term “seed money” has come to mean the money you saved and used to establish something new. Whether you want to restyle for retirement, stop working for The Man, or take time off to ruminate with the cows, if you don’t have some money, you probably can’t grow your dreams.
p.s. I’ll comment on the case study tomorrow. g
December 19, 2008 at 7:53 am
This post is definitely getting saved to show to my children! Gail, over and over again you bring fresh eyes to an stale, old problem.
I’ve got a saver and a spender, or I should say I had a planner and a stuff-buyer. I couldn’t understand why my son could see that wanting a new iPod meant he’d have to save that money from birthdays, Christmas (F. Sop gift cards lit up his eyes everytime he got one!), allowance, etc., yet his younger sister didn’t see the value of saving at all. I swear everyone could literally smell her allowance money burning in her pocket before she got through the Dollar store doors!
I’ve wanted to teach by example, but I am sometimes a ’stuff’ buyer too. My pantry and freezer are stocked enough to get us through about 6 months of NO grocery shopping except for bread and milk, but I bet if I could see the bottom of my freezer I’d find those things sitting next to the wooly mammoth in there! But I digress…so I thought the best way for them to learn some money lessons on their own that didn’t hurt too much would be to show them the difference between consumption wants and REAL wants. For about a month, after the allowances were doled out, I’d bring them to the Buck-are-us type store, but then I’d be sure to drive by the ‘I’ve wanted one of those all my life’ store. My son caught on very quickly, even handing over chunks of his allowance to go into the bank account to save for some of these wants. My daughter took a LONGER time to get it, and I think that she still breaks out into a sweat whenever she’s near a dollar store, but she’s getting it.
And this corn analogy is definitely something they’re old enough to read and understand, so thank you Gail, not only for giving me the tools to finally get my house of cards in order, but also for giving my kids a good start to a life of debt-free living (I hope!).
December 19, 2008 at 10:21 am
I would love to be able to teach some of these lessons to my 2 stepsons (ages 9 and 12) but am unsure how to approach it…any suggestions? It has to be an unknown lesson if you know what I mean…
December 19, 2008 at 11:33 am
what a wonderfully simple way to explain saving.
December 19, 2008 at 12:27 pm
To MICHELLE,
Ask your husband (or the boy’s father) to read the article and you both can sit and talk wth them.
December 19, 2008 at 12:58 pm
I also find the gardening/harvesting analogy helps me ‘get it’ versus columns of dense data. I forwarded your blog today to my 17 yr old son – I also have been showing my son how to use President’s Choice’s Interest Plus Savings Account. I set a goal which I shared with him (saving for his driving lessons + my 50th birthday bash) by setting aside x amount of dollars to this account each month. Then I show my boy how much interest I make per month just by having the funds sit there. He really ‘got it’ when he saw that one month the acount earned about $17 interest. It helped him better understand by translating the earnings to how much he made in his part time job (about $8.50 / hr). In his mind he saw 2 hours of ‘no labour’ worked to earn the same as 2 hours of shifts of work. Now he has his own high interest savings account.
For emergencies I started setting aside $100/month in an ING Tax Savings Account.
Happy holidays.
December 19, 2008 at 1:03 pm
Thanks for a lovely story, and some great thoughts on saving money.
December 19, 2008 at 1:06 pm
I think that in blended or separated families, it’s a more difficult lesson to teach michelle, but it can be done. Usually one parent tends to give more because they feel it’s OBVIOUSLY showing they love the child(ren) more. But it really hides their own guilt and fears under the disguise of “If I give you more, then you have to love me back more”. Not true.
Kids need to feel loved and valued in order to love and value back. If you want your stepsons to value a new gadget, teach them the importance and pride of saving for it themselves. They’ll be less likely to lose or mistreat something that they’ve waited and saved and worked hard (somewhat, I know gift cards aren’t hard work, but still) to get.
I think Gail’s blog today is a starting point, even to sit down at the dinner table and discuss to see what the kids think the underlying lesson is. Make it a game even…if I want something that costs $X dollars, and I save so much per week, how long will I have to wait to get it? Is there a cheaper version so I can get it faster? Do I really want it if it’s going to cost that much of my allowance money?
Good luck michelle, it can be done from any stage. I’m in my 30’s and I’m learning the lesson of save now, buy later (if I still want it by then) all over again! It’s hard to shut the greedy little kid inside me up some days, but so far I’m keeping her at bay!
December 19, 2008 at 1:16 pm
Michelle, re: your pantry. I am currently challenging myself to use up what is in my fridge, pantry and freezer. I started this challenge because I am moving in early Jan and want to eat up my food – but it’s a great exercise to see what you can make using only (or almost only) food you already have at home. You’d be surprised what you can come up with! Maybe you want to try it!
December 19, 2008 at 1:58 pm
Thanks SQ…I’m afraid it would put me into a panic though, to actually see the back of my pantry or the bottom of my freezer! My sister’s the same, and neither of us know where we get this irrational behaviour from. I’ve also got enough toilet tissue and kleenex stockpiled to outfit an airport bathroom at Christmas travel season!
Gail, as a side note, maybe if there was a blog on how to be the parent who tries to teach kids the value of a dollar saved when they’re going up against an ex who’s philosophy is ’spend, spend’, or even their own spouse who doesn’t get the need to teach this lesson, it might help arm some people with the tools to make a difference in stopping the consumerism and teaching old-fashioned patience and the value of saving again? We might be on to a whole new generation that creates new spending habits.
December 19, 2008 at 2:13 pm
Michelle, I totally agree with everything you said…it may just take some time to warm them up to it. Thanks so much for the ideas!
December 19, 2008 at 2:16 pm
Michelle…my mom does the same thing, and she says it’s because they had so little when they were growing up (very poor – 12 kids…do the math). I almost fell over one time when I asked her if she had a can of tomatoes and she didn’t!!
December 19, 2008 at 5:16 pm
Love this post!! What a fantastic way of explaining the idea of “saving”. I think youve done a wonderful job Gail…today and everyother day.
December 19, 2008 at 5:33 pm
Gail (or people leaving comments), I have an off-topic question regarding your show. You take away and sometimes cut up the credit cards but what happens to their credit rating? Does it improve? And do the couples normally go back to having one credit card?
December 19, 2008 at 6:43 pm
Gail-Love it!! Keep up the good stories! I’m more of a visual-person so this is great to read!!
~Good job to the “stockpilers”….If that were me, I’d sit back and relax for a couple months and stay away from the stores.
: )
December 19, 2008 at 9:16 pm
I too am a stockpiler of food. I My sis and I both do it, huge pantries bursting at the seams, it makes us feel “wealthy” and some security that we have provided for our families. And that is where the similarities end as far as spending. She also stockpiles clothes and knick-knacks (on credit). I opt for the emergency fund bank account instead!
December 19, 2008 at 10:50 pm
Doreen–your son is brilliant for thinking of the interest on saved in terms of ‘free’ working hours. i love it!
December 21, 2008 at 6:34 pm
Hi everyone from the land Down Under!
I read another savings website every day and the people on that website are trying to do a $21- challenge, where they only spend $21- a MONTH on anything and try to use up everything in their pantries.
I have recently started going through my pantry as I am moving too and the amount of food I have thrown away because it is out of date is shameful.
Anyway, there are some interesting articles about saving and some interesting tips as well. Some of it won’t be relevant as it is based in Australia but here you go…
http://www.simplesavings.com.au/
Sarah
June 9, 2011 at 9:51 am
Set your own life time more easy take the personal loans and everything you require.