The SEEDS of Personal Finance

If you sow good seeds, they will bear fruit.

I’ve spent a lot of time on here talking about the lessons of homeownership but this post is not the tale of starting a garden. I’ll save that for next spring when we tackle the random patches of dirt in our backyard. Instead this post is about sewing good financial seeds that will create a fruitful financial life, however you define that for yourself.

I am often asked to share the basics of personal finances and how to create a respectful relationship with money. I’ve hosted personal finance presentations for companies, professional organizations and most recently a class of fifth-graders and while every presentation deck looks slightly different and the question sparked vary, the fundamentals of each presentation are the same. This got me thinking, what is a really simple way to introduce the fundamentals of personal finance, model a healthy relationship with money and present it in a format that is simple and easy to remember.

I present to you all the SEEDS of personal finance.

Spend Less Than You Make

The key to any good relationship is respect. Respect is what fosters a good working relationships, fosters a healthy relationship between parents and makes marriages strong. You should think of your relationship with money in a similar way and strive for respect in that relationship.

One way to show respect to your money and honor the long hours of work that go into every paycheck is to spend those dollars wisely and on things that bring joy and support your values and financial goals. The first step to cultivating a respectful relationship with money is by spending less than you make. Spending less than you make means that you are saving a portion of your paycheck each month to put towards financial goals that excite you, short and long-term.

While simple in concept, the application of spending less than you make can be much more challenging. Budgeting is a wonderful way to ensure each month money is set aside for savings. The budgeting process can be manual or automated using budgeting software like or the like.  Whatever your preference, the important thing is to find a solution that allows you to commit to a savings plan each month.

Evaluate Debts

It is more common than not, these days, to meet people that have debt. These could range from student loans, credit card debts or a mortgage. The most common question I get around debt re-payment is where should I start and where should the focus be? For starters, collect information on the various types of debt and list them out including outstanding balance, interest rate, and minimum monthly payment.

Once this information is gathered in one place or on one spreadsheet, you can begin creating a game plan on how to pay-off each debt. The two most common approaches to debt repayment are the snowball and avalanche approach which I wrote about in detail in this post. I am a proponent for the avalanche approach and encourage my clients to knock off the debts with the highest interest first as the most effective approach from a dollar saving perspective.

More and more I’ve been fielding questions on if clients should pay down their mortgage faster and re-route dollars going into investment accounts towards mortgages. Being finance nerd and math centric person I am, I like to point out to clients the rates of return associated with a mortgage vs. a long-term investment account for retirement. Mortgages today are anywhere between 3%-4.5% and would produce a return equal to the interest rate if paid off. The typical long-term investment account is invested in a manner that targets 7-9% annual return over the long-term. Which bucket would you rather fill up?

Emergency Fund

An emergency fund is as fundamental as having an ID card. As an adult, you should never be without one. There will be times in your life that an emergency fund will be lower or higher based on external factors. If you in the process of paying off student loans or credit cards, it’s perfectly acceptable to have a more slimmed down emergency fund than someone with no consumer debts with children.

In this post, I go into more details on the purpose of an emergency fund and offer some guidelines on an appropriate level of funding given personal circumstance. The most basic rule of thumb is to have 3-6 months’ worth of essential living expenses saved into an emergency fund. And if you really want to step-up your emergency fund game, use a High Yield Savings Account.

Define Goals

Click HERE for a SMART Goals Worksheet

Here comes the fun part, in my opinion, creating and defining financial goals. Once you have a handle on your spending, debts and have a healthy level of funds set aside for an emergency, it’s time to start thinking longer-term. For those of you who have been around for a while, know just how much I love defining financial goals. Goals are an extension of your values. When you set a goal for your money, you make sure that your hard earned money being used to support those values which can lead to a more fulfilling and joyful life.

I’ve had clients tell me that they don’t have any financial goals and I have a really hard time believing that they have zero financial aspirations. When I hear this I tend to ask more questions around their values and priorities in order to tease out a response. A financial goal is nothing more than saying you’d like to accomplish “x” in “y” years. Some people will tell me that they want financial freedom before they die or want to purchase a nice car when they turn 40 and that’s enough to get the ball rolling. The only wrong answer is to not answer the question at all.

What’s important is to set goals for yourself, no matter how big or small, and to keep pushing forward.

Start Investing

If you’ve gotten this far and have planted the previous financial SEEDS, then you are ready to become an investor. As I talk about in this post, there is a lot that goes into becoming an investor and there are qualifiers you should meet before you earn the right to invest. Jumping into the stock market without having your financial house in order is no different than jumping into a pool not knowing how to swim; there is a very good chance someone will get hurt.

From my perspective, the stock market and investing is a wonderful resource that everyone has access to in this age of technology, but few take advantage of. At its core, regardless of the approach, people invest to have their money work harder for them which can create freedom and more options in the future. They key to growing meaningful wealth is to spend less than you make and to invest the difference.

The key to becoming a successful investor and grow wealth over the long term is to pick an investment philosophy and really commit to that strategy. Going into each investment philosophy would take a whole post within itself but I will point out a few common investment philosophies:

  1. Passive
  2. Active Market Timing
  3. Index Based
  4. Factor Based

Don’t know which philosophy to choose or where to start as an investor? I bring you good news, you don’t have to do it alone. Working with a financial advisor gives you access to their investment philosophy and a partner to help  ensure your investment philosophy and strategy compliments financial goals and plan.

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