Don't Eat Your Seed Corn
Never Spend Your Principal If You Want To Be Rich
Wise old farmers have long had a saying: Don't eat your seed corn. In simple terms, it means that every seed that comes through your hands has the potential to either be eaten or planted for next year's harvest. You need to make sure that your farm always has enough seed corn to replant the fields on your land so you enjoy another harvest next year. If you eat your seed corn, you won't have anything to put in the ground and you lose the farm.
Your family starves, and you are broke.
The "don't eat your seed corn" truism is often applied to finance in the old saw, "never spend your principal". Both concepts underscore a fundamental truth: When you expend something, you are not only giving up the item itself but all that the item could have produced in the future. In the case of money, that means when you spend $1, you are not giving up $1. You are giving up all of the dividends, interest, and rents that dollar could have produced from now until your death. For example, to an 18-year-old high school graduate who lived until he or she was 80, and earned the same rate of return the stock market has earned, on average, for the past couple of centuries, $1 is really more than $368. By spending the dollar today, the newly minted adult is spending $1 plus $367 in future dollars.
3 Steps to Apply the Don't Eat Your Seed Corn Rule to Your Own Investment Portfolio
There are three easy ways you can use the farmer's rule to improve your own finances and investment portfolio.
- Identify the specific assets and dollar amounts that are reserved as seed corn: In my family, we call this our "permanent capital" reserve. Think of it as an endowment at a university or charitable foundation. This is money that should never be spent, under any circumstances, even if it means you have to sell your car, your house, your artwork, and get a second job. If you need to live off your investments, you are only allowed to spend the dividend income or other profits thrown off by the seed corn. The seed corn itself is sacred. Spending even a penny of it would be sacrilege.
- Calculate how much money you are going to add to your seed corn each year to combat inflation and taxes: The value of money falls over time in most societies because elected officials print more currency with each passing year. To combat this inflation, you often need to grow your portfolio value so that you are generating more dollars, euros, yen, pound sterling, or whichever other currency you require in order to purchase the same quantity of milk, cheese, bread, eggs, heat, clothing, gasoline, and entertainment you could in prior years. To guard against inflation, focus on purchasing power. It is all about purchasing power.
- Determine the end game plan for your seed corn: Do you want to spend all of your money before you die, eating the seed corn you have accumulated in the final five or ten years of life? Do you want to leave all of your seed corn to charity or family members? What, in other words, is the end game? You cannot, and will not, live forever so you need to be very specific regarding your plans for what you have acquired during your lifetime. Ultimately, it's your money. You can't take it with you so you need to dispose of it, or use it, in a way that reflects your own desires and convictions. For me, that vehicle is the Kennon & Green Foundation. For you, it might be something like a charitable remainder trust.
A Final Tip to Protecting Your Seed Corn
One way you can avoid the temptation to dip into your seed corn is to use what I call a central collection and disbursement account. Doing so results in the dividends, interest, profits, rents, licensing income, or other gains you see being deposited into a bank account dedicated to disbursements, not the brokerage accounts or retirement trusts that hold your investments. The end result is that you only deposit money into the structures that hold your stocks, bonds, real estate, or mutual funds, never taking money out of them. It erects a barrier between you and your principal. This approach isn't foolproof -- if you are committed to doing something unwise, you are probably going to find a way to do it -- but it can slow the process down a bit, giving you time to think.
Never forget this rule: Don't sacrifice what you want for what you want right now. Keep that inscribed on your heart and protecting your seed corn should be much easier.