Don't Eat Your Seed Corn or Principal Money

Dollar bills growing on a tree symbollizing principal money that grows when untouched
Photo: Barbara Friedman / Getty Images

The "don't eat your seed corn" truism is often applied to finance in the old saying, "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. In other words, if you take a dollar away from an 18-year-old today, you are not just taking away his or her $1. You are taking away all of the potential earnings on that dollar, which could actually represent hundreds of dollars over their lifetime.

Don't eat your seed corn, in simple terms, 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.

3 Steps to Apply the Don't Eat Your Seed Corn Rule

There are three easy ways you can use the farmer's rule to improve your own finances and investment portfolio. 

Identify Your Seed Corn 

In my family, we call this our "permanent capital" reserve. Think of it as an endowment at a university or charitable foundation. It is "the money that makes the money," so to speak. 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, or 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 due to inflation. To combat this, you often need to grow your portfolio value so that you are generating more dollars to maintain the same standard of living. To guard against inflation, focus on purchasing power.

Determine the Final 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 10 years of life? Do you want to leave all of your seed corn to charity or family members? In other words: what's your endgame? You won't 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. 

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.

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