3 Key Concepts of Financial Maturity

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When I was in the third grade, we lived in a duplex townhouse right next to land that was to soon become Interstate 65 in Birmingham, Alabama. I still remember the giant boulders, mounds of dirt, and earth moving equipment that provided an incredibly interesting daily show for this little 9 year old boy. I had no concept of financial maturity, or any other kind of maturity, but I did understand the principle of reaping what you sow because of the vacant lot next door.

You see, the vacant lot between our townhouse and the interstate was too small to be used for anything, so my parents asked the landowner if they could grow a garden there. We planted corn, tomatoes, lettuce, peppers, squash, onions, and cabbage and guess what? We harvested those exact same items, precisely where we planted them. We were never surprised by what grew in our garden (other than weeds!).

So, when you plant bad choices, debt, and poor financial decisions, why is anyone surprised when the harvest doesn’t produce wealth and prosperity?

The same concepts of garden maturity apply to financial maturity.

What determines whether someone is financially mature? I believe there are three key concepts:

1. Financial maturity is the ability to delay gratification.
A financially mature person has a long term perspective that focuses, not on the here and now, but on the there and then. They have the ability to give up today’s desires for future benefits.

My Dad spent his day wrangling a roto-tiller but could have spent his day relaxing, watching a baseball game, or lounging around. But he knew that putting in some work now would result in future benefits.

2. Financial maturity understands the opportunity cost of consumption.
Who hasn’t fallen prey to the impulse items placed next to the checkout line? The financially mature person, however, understands that a few dollars spent here and there can really add up. If an 18 year old were to save just $4/day and invest it into a index fund averaging 10% compounded monthly, they would have over $1.1 million at retirement age…the FIRST retirement age (62). Wait just 5 more years, continuing to save the same amount and the total balloons to $1.88 million.

A dollar spent today doesn’t prevent the use of a dollar from the future, it prevents the use of multiple dollars from the future.

Gardeners will allow some plants to produce a harvest that “goes to seed.” That is, rather than eat it today, they allow the fruit to get really large and mature. Then, the seeds become viable for drying and planting next year. Old timers would faithfully save seeds for future plantings.

One cucumber seed has the potential to produce a plant with dozens of cucumbers which in turn, can produce thousands of seeds, which can produce more plants, more seeds, more plants. It is a beautiful picture of the power of compounding.

3. Financial maturity realizes that money is a resource. “NO FUN” compounded over 40 years at 12 percent equals “REGRET,” (and we have no interest in that). The financially mature person realizes that money is only a tool. It helps you accomplish something. It is not necessarily a means unto itself.

The garden didn’t determine whether our family lived or died. It was simply a resource that helped make our lives better. We enjoyed huge salads with friends and we loved having vegetables available for preservation, but we would have survived without them.

Money is not life. It isn’t oxygen. You don’t die without it. It’s simply a tool and the financially mature person adjusts his or her lifestyle, expectations, and plans based on that tool’s availability. The financially mature person does work to increase its availability by making extra money and spending less on unnecessary consumption.

Technorati Tags: Financial maturity, money, personal finance, gardening, compounding, opportunity cost, economics, financial planning, investment, investment, financial strategy, financial debt

photo credit: dbzoomer

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