Setup for Life – What is Seed Money?

Give it enough time, and everyone gets that warped dream of firing their boss, being financially independent, retiring early and living their life however they hell they like. There is a phrase that gets thrown around a lot. ‘ … Setup for life …’

It also goes with many other expressions …

Bigger contributions to the 401K or Superannuation will ‘Set you up for life.’ Winning the lottery can ‘set you up for life.’ That next high paying job will basically ‘Set you up for life.’ This is the deal that will ‘Set you up for life.’

So what does set for life mean and what does it look like?

When it’s all stripped back to bare basics and essentials, being set for life actually has very little to do with having personal or commercial affairs in order. Being set for life is about true financial independence and the security to know where financial support is coming from in future.

Not only do we have to strip things right back to bare basics, but when we go further to deconstructing the financial journey towards independence – being financially free stems from a origin point … a point where it all comes from … a thing called ‘seed money’.

What is it & Why is it so Vital?

So what exactly is ‘Seed Money?’ Seed Money in essence is where all your future money comes from. In effect…

‘Seed money is the amount you have or need to start investing with and the amount of holdings you can never let go, or fall below’

Seed Money is like your financial foundation. It doesn’t matter what happens around it, as long as you have your seed money – the kernel from which everything else comes from, financial independence can be reached and held.

What makes Seed Money so important is that once the ‘Seed value’ or ‘Seed Amount’ is reached itself, is that this ‘Seed Amount’ must be protected at nearly all costs, because if its compromised then you’re literally back at a job saving money from a time for money trade.

Sadly the vast majority of people out there, never know of, define or ever reach the ‘seed value’.

Related: Why Being Rich and Financially Independent are two different things

How much do you need?

This is a personal question and no answer out there is wrong. But it can take a bit of time and planning to sort out and determine. Strategy is vital, not just because a strategy is needed, but because without one, you technically have no seed money.

As the name suggests, Seed Money grows! Seed Money provides the surplus that provides financial independence. Strategic returns are used to determine how much seed money you need.

Firstly lets look at how much money you will require for a life time.

This is where you pluck an annual income. Anything goes! There is no wrong answer. Whatever your answer is, is okay, and you’ll see exactly why seed money is so important.

Assuming that you want to retire early (35?) and live till … (100?), you need 65 years’ worth of income. (Why not right?) For consistency with other articles, I’ll say $150,000 per year. This is where the vast majority of the public reduce the goal. But let’s stay consistent.

True retirement, means not ‘Having’ to work, so 65 x $150,000 è $9,750,000 is how much you need to be ‘set for life.’ Here you need to win the lottery. 401k’s and Super wont accumulate this much, and most people won’t earn this much in a professional life time.

Lets be honest $9.75 Million is a bit of a stretch to gain by the age of 35.

But even if you did … having the gross amount probably won’t work for three reasons.

  1. Getting it to start with.
  2. Depreciation of Money.
  3. Blowing the Budget, and then robbing your future to cover your past.

Or there is having an income strategy – yup … Seed Money. Having less today, but getting more in future.

Seed it up

Getting $9.75 Million up your sleeve is a bit of a stretch, but earning $150,000 per year … is far more realistic … with strategy.

Hence Seed Money. Seed Money isn’t just what you have or what you need to start, it’s where things kick off from. That’s where you need to know growth rates.

The more aggressive the growth rate, the less Seed Money you ‘Need’, But things have to go right.

The more conservative … the more you need, despite having more tolerance for lack of growth.

Related: Why you have to be asset rich

Phases of Wealth

As the name suggests, Seed Money lies at the heart and the start of most financial journeys. There’s also a reason that …

‘Seed money is the amount you have or need to start investing with and the amount of holdings you can never let go, or fall below’

Because more often than not, 99.999% of investors or people who think about investing (or seeding a business) don’t have ‘all’ the seed money they need before they start to replace their income.

That means, seed money is often ‘what you have’ now, and what is growing (over time) until you have enough to pull from, and that means that investing (aside from positive reports on paper) can seem like a fruitless journey for many years.

This also places pressure on your strategies. Why? Because of the phases of wealth.

The phases are commonly references as … Accumulation (building & growing), Preservation (… protecting) & Conservation and Distribution (keeping what you have, and using it as times goes on)

The problem is with this definition is that it doesn’t go all that deep. Hence my phases.

1.      Initial Saving

Unfortunately, there is a time where you need to work for money and hoard what you don’t use and save for your seed money … with nearly no support from the bank. Today … you’re on your own here!

2.      Seeding Phase

Using the initial seed money (From savings) you have to grow more seed money

This is an important phase because seed money comes down to the bottom line. Capital! At this stage growth is everything – and research and personal appetite is of paramount importance. This is also potentially where you might want to think about exploiting volatility for rapid growth. Getting on the right side of the trade with Cryptocurrencies, or speculating on stocks that are moving, are legitimate options, but it doesn’t mean that opportunities are always available.

Being bold during the seed phase is also important. Many first timers (early investors) add $50 per week or $500 per month to their strategy.

As much as I hate to say this, but a 100% movement with $1,148 (example) in the market will only give you $2,296. Shame about not being committed.

Committing to a researched strategy with $15,000 in the market, and a 10% movement will yield an additional $1,500 …. More than the first scenario. Return is scale x volume. You want both halves of the equation.

3.      Initial Income replacement

This is when the strategy begins to show signs of consistency and stability. Property strategies, are very consistent and stable, while stock’s tend to show some variance in returns. These returns (from the cash flow portion of the strategy) at this time won’t be enough to fire the boss, but enough to replace a portion of the income, and start allowing some devious ideas to form.

4.      Income replacement – Full Seeding (Critical Mass)

This is where the returns from the investment strategy for the first time and regularly totally replace the income, and should it be required, income can be taken while leaving the (now defined) bare minimum seed money in the strategy for future growth. Welcome to critical mass … the tipping point.

5.      Risk Reduction & Diversification.

Once Seed Money has been set and defined, a good suggestion is to spread and double your seed money in order to become more robust with your plan. If one investment goes flat, another can step in to support yields.

6.      Storage Stage – The war chest!

Once diversified, across 2-to-3 positions or holdings, we enter the storage phase. As COVID has shown us, having a war chest to draw from is important. This is where stocking up and piling away months or a years worth of income for an investment winter in the event world falls over again is vital because the war chest is where you drip feed yourself an income from a cash reserve even if your investments yield nothing, until such time as they produce fruit again.

For business, a war chest provides a time buffer to pivot, re-structure and revalue.

7.      Ongoing risk Reduction, Diversification & Storage

Now that you have Seed Money, and a war chest big enough to carry you through for the next …. 6 months, it’s now time to protect the portfolio, and reduce your risks. At this time, the chances are good that your returns will be greater than your lifestyle. Here you have freedom – add the surplus to the war chest or look at another investment to protect against future slumps.

It all starts with a goal! If you’re really hitting things out of the park, then you can go to stage 8 – the ‘philanthropic stage’ where you help others.

Related: How much do you need to retire early?

When can you start & How to use it?

So when do you start with your plan? This is a very subjective question, and it comes down to personal taste and as well as being ‘market ready.’

Personal taste is all about your strategy, and any potential for risk, and the amount of effort you want to put into it.

Typically speaking the safer the strategy, the smaller the returns, and the smaller the effort. This means that the cost of entry into those markets are typically higher. Saving for a deposit for a house can require 6 figures, and years to gather and that all depends on if it is possible depending on how the market is moving.

Strategies that require a lower cost of entry, can be entered earlier with smaller amounts, but will require some more education, and also some more effort and management on your part. The upside, is that smaller initial amount invested at stage 2, is going to start working harder – earlier to move you to the next stage.

In short, see what suits you … see what you can start in … get educated … and don’t wait.

Related: What $150,000 Looks like for your Independence

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