The New-Age Lemonade Stand …

Lemonade StandPeople think my son is following in his father’s footsteps …

… but, I didn’t even think about beginning my entrepreneurial journey until I was 26 (and, didn’t actually start until I turned 30).

My son, on the other hand, started his entrepreneurial journey when he was 12.

Whereas most children begin by starting a newspaper delivery round, or opening a lemonade stand – although, at age 10, he wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell) – my son was a little different:

At 12 years old, AJC Jr came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, and your encouragement and support (but, NEVER, EVER push) your children may embark on a similar journey … after all, the barriers to starting a business (i.e. by going online) have been lifted.

Why should your entrepreneurial child start a mere lemonade stand, when any child can now start an online marketplace for anybody who wants lemonade and anybody who can make it (or supply the ingredients and know-how)? 😉

How to give your children $1 billion each …

When I was still on my own personal financial ‘seeking journey’ …

[AJC: This is the journey that you may be on right now; you know, the one where you read Every Available Book And Blog on Personal Finance Looking For the Mythical And Magical Secret To Financial Success But End Up Settling On Becoming A Miser Disguised As A Debt-Free, Frugal-Saver]

… I remember being very impressed by a tape set [AJC: Yep, that’s a cassette tape set] about a guy who had a ‘system’ to guarantee that your children could become billionaires in their own lifetime.

I no longer have the tape set, but it was all to do with putting aside $x per week (and, adjusting for inflation) and relying on the power of compounding (sic) to allow the sum to run up to $1 billion.

Sounds simple, so I ran a few numbers on my own, and here’s what I came up with:

– Put aside $5 a day, beginning the day your children are born

– Increase by 5% each year and keep up for 40 years

– Vest the sum into your children’s names when they are 80 years old

Then they will each have $63 million dollars!

Not exactly $1 billion, but not a bad sum, right?

Now, it’s really a Grandchildren’s (or, Great Grandchildren’s) Plan, because your children may not even be alive at 80, but if they do the same for their children, and so on, it’s a reasonably smart and easy Generational Wealth Plan and your progeny will thank you for it (well, you won’t be alive, but take my word for it).

But, there are (other) problems:

– Your children have to wait until they’re 80 to ‘cash out’

– You have to contribute for 40 years, starting with $1,825  year and ending with $12k a year (probably, when YOU need it more than your children do)

– And, $63 million is ‘only’ worth – a still healthy – $5.5 million in today’s dollars

Ashley Ormond (a fellow Aussie) has a more practical, shorter term plan in his book that shows you “how to give your kids $1 million each!”

It’s essentially the same kind of plan, obviously running for a shorter period, and includes interesting tweaks such as having your kids pay you back your $7k initial contributions. It also includes sensible children’s savings strategies (such as setting them up with individual ‘saving’, ‘spending’, and ‘investing’ accounts) … but, the rest of the book is Aussie-specific.

Still, all these ‘power of compounding’ books and strategies show me – after spending a LOT of time, in the service of writing this blog, playing with simple spreadsheets (and, you should do the same) – is that there is no real power in compounding at all …

… it’s just simple maths and (a lot of) time, and if you rely on it for your real wealth … well … you’ll never have any 😉

Start a new business or work 100 hours per week?

The title of this post is a little misleading, as my astute readers would know that your business will also ‘cost’ you 60 to 100+ hours a week, even as it matures.

But, Con has a real ‘business v job’ dilemma:

I’m kinda stuck in a dilemma as to what I should do after graduation in June this year.

I did my undergrad for 3 years, worked for a year and went back to school for another 2 years to get my masters.

I recently got a job at an investment bank making around A$100k after taxes. However, I will be working 100 hour weeks.

I really enjoyed my time when I was a kid going through highschool because I used to sell stuff online and amassed a small fortune about $30k out of that. I don’t think any 17 year old kid had that much money back then. However, I stopped selling stuff because of other commitments and ‘uni life’.

After so many years of formal education, I think that too much education is a hinderance to entrepreneurship. I have about $50k in capital right now, and I am thinking of starting something small.

But on the other hand, if my business doesn’t work, I will be sacrificing a ‘good’ career opportunity + time wasted. I am 23 this year, and my peers have already 2 years of work experience ahead of me.

Unfortunately, I can not give Con – or, anybody for that matter – direct personal advice, but I can tell you about my 16 y.o. son who has a very parallel life and aspirations:

– My son is still in high school and started off selling eBay stuff online and now has ‘graduated’ to a fully-functioning web-site that earns him about $100 a week … I’m sure it will make him a lot more if he knew how to promote it online.

– My son wants to be an investment banker but is not happy about the typical 100 hr work-week and, neither should Con be happy with that set of working conditions … for long!

Since I can’t give Con personal advice, what I would tell my son is:

1. Continue on the educational path that seems to make the most sense / offer the most opportunities (if he asked me if investment banking – and the double law/commerce degree required – was a good choice, I would say “it’s up to you, but I think it’s fine!”)

2. Continue to build his businesses part-time … with luck, his business (or, any future business he decides to start) will replace the time/revenue from a part-time job. Hey, nobody gets to study without working at least part-time, right?

3. At some stage he may need to make the hard decision: continue studying or continue to grow the businesses, but that’s unlikely.

Which ultimately might lead him to exactly where it sounds like Con is today:

My advice – if my son chooses to ask for it – would be to work at least 2 years at the required 100+ hours / week, then make the ‘corporate life v business ownership’ decision; he should walk away with some excellent corporate/professional experience and he should have some serious debt paid off and some big $$$ behind him … in the meantime, I would strongly advice my son not to spend a dime unnecessarily.

For anybody still going through college or starting their first job or business, I say:

Keep living like a penniless college kid, mooching off family and friends like any ‘normal’ college kid does, while you’re busy investing 99% of what you earn.

Then you’ll have the capital (and/or no debts) to do whatever it is that you like!

Are you still relying on your mother?

At what age is it appropriate to take financial responsibility for your own life? Before college? During college? After college?

When is it appropriate to grow up, financially?

To help us explore this issue, here is a question that I received by e-mail from RichKidSmartKid:

I’m 29 presently in my first year of college where I used money from my inheritance that I had invested, sold and used to pay for college. I’m soon going to be broke and wont have an income and will be relying on my mother to help me financially though school.

I want to bounce back from this financial hell and increase my networth. Possibly even made some money by the time I complete univeristy. I was wondering what advice do you have?

Sounds like her name is where RKSK wants to be rather than where she is. It looks like she had money, but now it’s gone, and would like some again!

Look, with $6k cash and going to college, the reality is that she is still probably $6.5k better off than most college kids, so here is my advice:

1. Talk to other college kids and see how they do (or intend to) get by – it’s amazing how much you can learn by listening to what other people have to say – then do the opposite 😉

2. Read this post, it’s probably my best advice for college-age kids:

Now, this doesn’t directly apply to RichKidSmartKid who is 29 – but, only in 1st year (good on her for finally thinking about her education, though) – but I have an issue with college kids calling themselves ‘kids’:

In most countries (other than those in the privileged west), by the time you reach college age you would be an adult, long married, with plentiful hungry children and a crop in the field.

In those countries, RichKidSmartKid would have been considered a self-supporting adult a LONG time ago!

Maybe it’s time to start thinking like one now?

Beginner’s Luck?

I am guilty of a lot of things in writing this blog …

[AJC: I’ll let you name them in the comments below … go ahead, I can take it, and it might be fun!]

… but, one of the things that I am DEFINITELY guilty of is writing without the beginner in mind.

Since there are no ‘backlinks’ and Nate has gone to a lot of trouble to ask this question, I have to assume that it’s genuine:

Does inflation affect money invested into cds? If not then you could invest your million into a cd or many, wait a few years and you should get a pretty good turn out right? Say you did put your million into a bank and had decided to use the intrest made off of it, would that interest get taked like your income does? or would you be able to see all of it?

What I am guilty of, here, is not realizing that people still lack this most basic level of financial knowledge. And, I certainly don’t address this kind of stuff, here!

To be fair, I’ve always taken the view that if there is plenty of information available elsewhere, why post on it here? Just take a look at the incredible job that Andrew @ Money Crashers has done to put together this list of ‘top’ personal finance blogs: there are 387 in this list alone!

So, what do you think? You want ‘beginner’s info’ so go elsewhere? Or, I should cover this sort of stuff (inflation, good debt v bad debt, etc.) in this blog?

Oh, and as to Nate’s question; if you really don’t already know:

Inflation and taxes are like the police (when you have just accidentally run your first ever stop light in 20 years of driving) and death … unavoidable!

Financial advice for an 18 year old …

My blogging friend JD Roth (at Get Rich Slowly) offers some advice to an 18 y.o. who asks:

Are there any other resources you would recommend to a financially clueless 18 year-old?

JD gives some of his usual good advice:

Maybe it’s because of my own experience racking up debt during college, but I think it’s important for young adults to learn the fundamental law of personal finance: To build wealth, you must spend less than you earn. There’s more to it than that, of course. The less you spend, the more flexibility you have.

… but, I really want to be able to tell this kid:

After teaching ‘kids’ to save some / spend some (to understand that there needs to be a balance), and all those other wonderful things that JD suggests in his post, I would strongly advise any young reader to get some ‘business experience’ on the side.

Fortunately, with the internet, that is SO easy these days:

1. Start a ‘for money’ blog. Stuck for a topic?

Try this: write a blog aimed at other high school / college kids chronicling your attempts to improve your own financial situation … worst case, it could read as comedy.

2. Sell stuff on eBay; even better, find stuff in China and then sell it on eBay.

Try not to get ripped off AND make a profit. Write about it on your blog … it will DEFINITELY be funny!

3. Start a web-site selling anything; OK it may not make money (or, it COULD become the next Facebook), but you will learn heaps.

Better yet; try all three!

What financial advice would YOU like to give this 18 year old?

The lament of the trust fund baby …

It seems that my Rich Dad. Rich Kid? post struck a bit of a chord with some of our readers; the post was essentially questioning whether your kids are rich – or should be – just because you are –  or, will soon become 😉 – rich yourself?

The universal agreement seemed to be that the best financial ‘gift’ that a wealthy parent can give their children is education … particularly education about money; something about teaching children to fish …. ?

That leads me to Diane who suggested that I write a follow-up post, saying:

I married a man who was the son of rich parents and rich grandparents. He didn’t have a lot of motivation, but I liked the fact he was not a workaholic. Divorced now, I do not know how his parents and grandparents’ trust funds have fared, both with the economy and with is father’s aging (a topic for another post, Adrian? How to help the aging parent who’s used to controlling the funds but perhaps has lost his cognitive ability and no one has recognized that decisions are impaired? But I digress…)

Let me deal with both Diane’s question and the whole ‘spoil the child?’ subject with two personal stories:

Firstly, Diane’s question about the aged dealing with finances is a real one that can only be solved with a willing ‘aged one’, some personal ethics, and an Enduring Power of Attorney:

My grandmother is 96 years young; she is in an old people’s home now – having just moved from her retirement village (i.e. over-55’s) due to an over-medication issue – her doctor’s fault. In short, she’s more capable than you or I.

She’s so capable, in fact, that in the last 2 years she personally engineered the sale of a substantial downtown property on behalf of herself and her partners, fetching a record price. She handled the realtors, the attorneys, and her partners herself. Period.

However, she also put in place a Power of Attorney (“just in case”) and has recently set up a trust fund to deal with the cash proceeds.

So, my experience is with somebody who is mentally capable of recognizing their own strengths – and weaknesses – and puts in place the appropriate strategies. She also recognized that my mother may not have the same capabilities so has set up a trust involving my mother and an attorney (not exactly how I would have set it up, but it’s not my call) to try and protect the assets for future generations.

So, my only counsel is that you have to put in place the safeguards, well in advance of the problem – with the elderly person’s consent … if they don’t want to play ball, well it’s their money  …

… which brings me to the second personal story:

I am one of three siblings, having a slightly older sister and another sister a few years younger; neither of whom exhibit any signs of financial intelligence (one has no money, no job, no prospects, and the other has no money, a part-time commission-based job, few prospects, and gave away her house to a con-man despite warnings … ’nuff said) … since I have at least some sense of financial responsibility and a desire for self-sufficiency, I can honestly say that I can’t relate.

It was explained to me once by a professional why my sisters and I are so different (and, why I am now wealthy and they are now ‘broke’ … awaiting the next regular dose of parental hand-out): you see, my sisters believe that they grew up in a rich household … that was the impression that my father gave my mother, sisters, friends, bankers … in fact everybody but my grandmother and me.

He would live beyond his means then go to my grandmother for handouts to maintain his comfortable-to-upper-middle-class lifestyle (and support his usually failing business ventures), but he would tell me our true financial situation: just over broke.

Since finances were never discussed openly in our house, I didn’t realize that I was the only one who knew the truth … so, I simply grew up in a ‘poorer’ household than my sisters, which meant that I automatically worked every weekend and every vacation and bought all of my own clothes, cars, and saved for my own discretionary spending. My sisters, of course, simply held their hands out, as and when needed.

Therefore, as the professional explained it to me, I simply grew up responsible and my sisters didn’t. As things turn out, this ‘education’ was a blessing for me …

So, here’s where the two stories intertwine:

Early in my career, I still felt that I had a financial ‘safety net’ – even though my parents were struggling, there was always grandma in the background if things really went awry … not to mention a nice large inheritance surely to come ‘one day’.

Until I realized that (a) the family assets would need to be spread over more and more people as they (eventually) moved from my grandmother to my mother, [perhaps] then to my sisters and me, and (b) my sisters (and, mother) had a huge capacity to consume … so who knows if there will actually be any assets left if my turn should happen to come? That’s the time when I made the key decision to become truly self-sufficient: independently wealthy (you read how this came about, already).

This is the point: if you rely on a safety net, chances are that you will need one, but it won’t be there when you need it.

But, if you choose not to rely on a safety net – instead, choosing the path of self-sufficiency – you will end up creating your own safety net …

… and, if the inheritence happens to come through, you have the perfect means to start your own charitable foundation 🙂

Should you pay your children to read? I don't think so!

I left a comment on a great post by Free Money Finance (I’ve mentioned FMF before as being a GREAT source of Making Money 101 ideas!).

Basically, FMF was commenting on an idea that has been around for a while … the idea of paying your children to read!

I have some strong thoughts on the subject of children (I approve of them), money (I approve of it), paying children to read (I don’t approve of it), encouraging children to save for ‘retirement’ (I STRONGLY approve of it) and thought that I should simply repeat my comment here:

Having kids EARN their pocket money is a great idea! As a matter of personal preference, I would prefer NOT to pay my children to learn.

Whether you pay them to work, pay them to read/learn, or just give a hand-out, what IS important is how they deal with that money.

For example: we give each child TWICE their age in pocket money every month (others do once their age a week), but they must SAVE half (not for cars, toys, or anything else … JUST for future investments) and we encourage them to SPEND the other half (saving it up until they have enough for the ‘good stuff’). Loose change is thrown in a bucket by all for CHARITY …

So far, my 13 y.o. son who supplements his ‘income’ with an e-Bay business (the spend half / save half policy also applies to his e-Bay profits AFTER funding inventory) has bought himself an iPod touch, an Apple Mac, AND an IBM laptop – all this year (he has invested his entire savings in my Scottrade account … he accounts for 0.001% of my portfolio from memory).

Do you pay your children? If so, what for? How much? And, what do you hope and expect they will do with it?

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What about the children?

My son is 13 and seems to be learning valuable lessons about finance – mostly self taught – almost every day of the week.

Here’s what we do: we pay our kids their age in pocket money every month (common wisdom is to pay up to twice their age … if my kids read this post, I’m toast). Our kids then have to split their monthly pocket money into two equal piles: Savings and Spendings.

 Savings is for retirement … period. That should be before age 40 or so, if they follow ‘The Plan’ that starts now …

Spendings is for anything we don’t buy them, including: charity donations (over and above what we give as a family), toys (over and above what they get through the normal course of holidays, birthdays, etc.), and cars.

If my kids are smart (they are), they will save much of their spendings for their first car (they know that we will only contribute a maximum of 50% for their first car, they will need to come up with the rest).

It won’t be for college … we will pay for their education (first degree only) and student loans (that they can pay back) can supplement any shortfall.

More on this later … for now, you can imagine the discussions that we are having with our son about his desire to upgrade his perfectly servicable laptop to a Mac.

 He is have to learn how to make fairly sophisticated financial trade-off decisions at a fairly young age, as well as learning how to use equally sophisticated financial logic to argue back …

 … for example, he has already shown us that just 2 hours of work each night stacking shelves at the local Walgreen’s on minimum wage of $6.50 an hour will buy him an excellent car in just 12 months … now, can I have my Mac, please?