Insights from The Seed Tree: a Financial Fable

I originally came across The Seed Tree: Management and Wealth Building Lessons for Teens, by Stephen Carter, while I was looking for something to give my daughter. Since then, I’ve read no less than twenty books on finance for young (and soon to be) adults. The Seed Tree is still my favorite!

One reason Carter’s book stood out to me was the explanation of why he wrote it. Seeing one of his former high school students, who was now thirty-something, brought his attention to the speed at which time passes.

As the author pondered this, his attention turned to how pronounced the power of time is when it comes to investing. Carter wondered, as so many have (myself included), how different people’s lives might look if they’d graduated from high school with more financial knowledge.

This line of thinking left Carter with a question, “How do I convey these concepts to those who can make the biggest difference in their financial lives armed with this knowledge?” Unfortunately, when he looked at the available finance books for young adults, he didn’t feel any of the options would engage his students.

So, Carter wrote his own! The Seed Tree follows a sophomore who enrolls in a finance course with Mr. Sharp. This approach to presenting the information, writing it as a story, makes it easy to read. It allows teens to absorb the thoughts and responses of Andrew (someone their own age), who’s trying to digest the core material from each lesson, to wrap his mind around concepts that he’s hearing for the first time.

Here are some of the most profound takeaways:

Building wealth is a practice

The first assignment Andrew receives is to get a job. Mr. Sharp doesn’t just want to tell him about banking, taxes, and investments, he wants Andrew to experience what he’s learning firsthand. Sharp understands the importance of applying financial knowledge. Building wealth is about more than comprehending concepts, it’s about living them.

Budgets and New Year’s Resolutions fail for similar reasons

Failing to plan equates to planning to fail. A dream or desire is only as good as the strategy that propels it. Sticking to a budget requires shifting one’s habits and mindset, neither of which will happen overnight or without concerted, consistent effort.

Budgeting is not as restrictive as people believe,
having one is the path to financial freedom

The great paradox of budgeting is this: It is only within the confines of the budget that a person can escape being financially trapped.
Mr. Sharp, The Seed Tree

The Fine line between want and need

When Mr. Sharp has Andrew sort his budget items into wants and needs, they pause to consider where his cell phone should go. This illustrates the somewhat subjective criteria we use when determining what we “need”. Yes, we require food and water… but do we need organic food and bottled water? It turns out that the distinction between discretionary and non-discretionary spending is a bit fuzzier than we’d like to admit.

Subtract tax!

This is something I see all the time. People say, I make $X per hour, so it will take me Y hours to save for Z. The problem is, they didn’t deduct taxes in their calculation.

When someone starts a new job, they say, I’ll be making $X, so I can afford to spend $Y on my mortgage. But, yet again, they didn’t subtract the taxes!

It turns out our salary, for practical purposes, is a fictitious number. One we may be better off erasing from our minds completely once we formally accept a position.

Calculate your “real wage” – what’s left after taxes, gas, childcare, parking fees, business attire, etc. Using this metric to determine how many hours it takes to buy a product will put things in a completely different perspective!

High income earners aren’t Always wealthy

Wealth isn’t about what you make, it’s about how much you save and invest. Jessica can earn $500,000 a year and live paycheck to paycheck. Meanwhile Jackie, who earns $100,000 a year, becomes a multi-millionaire.

$100,000 invested Early can become $1,000,000

Letting your money earn money, over a long period of time, leads to exponential growth.

“I get the concept [of compound interest] and all,
but I wouldn’t say it is the best thing in the world.”
Andrew, The Seed Tree

“Then you’d be disagreeing with none other than Albert Einstein.
He once said that compound interest was the eighth wonder of the world.
In fact, here’s the quote attributed to him:
‘He who understands it, earns it; he who doesn’t, pays it.’”
Mr. Sharp, The Seed Tree

Translation – while those in the middle class borrow money, the wealthy invest it.

Sharp points out that the value of time spent learning, or with those we love, compounds as well!

Adopt effective habits

Be careful not to let what’s urgent stop you from doing what’s important.

Also:

Be kind
Be confident
Act

Set SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) goals for growth.

Determine your “Why”

Know, very specifically, why you do what you do.

When comparing investing returns, its important to factor in taxes

The tax consequences are very different between Roth, Traditional, and Brokerage accounts. Holding time (whether realized gains are long or short-term) also has significant ramifications.

Don’t put all of your investment eggs in one basket

If you choose well, buying individual companies can bring oversized rewards, but holding too much of your worth in a single position carries significant risk.

The stock market moves in cycles.

Some days, the bulls (market optimists) will have the ball.
Other days, the bears (market pessimists) will have the ball.

The market goes from the bottom (stage one) through the curve up (stage two) before plateauing (stage three) and spiraling back down (stage four).

Different investments do better in different phases.
No one knows how long each phase will last.

Diversification is a solid long-term strategy for capital preservation as the market moves through its cycles.

Accumulate assets

Assets amplify and grow revenue.
Liabilities drain and decrease our revenue.

Make sure you’re investing more in the former than the latter!

More Than Money

Carter’s last chapter shares a few life lessons on everything from selecting the right profession to marital compatibility. Mr. Sharp’s final pearl of wisdom is about balancing personal and professional life.

If you appreciate the highlights, I suggest picking up your own copy of The Seed Tree: a Financial Fable Money Management and Wealth Building Lessons for Teens.

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