Why I Don’t Want My Children to Save, or: Mini-MBA, Part 2

cropped-jmc-lemonade-stand.jpgThere was a study many years ago questioning how to predict business success later in life. The answer to the study was the age you started your first business impacted how successful you were later in life…I had all kinds of small businesses when I was growing up. When I was 6, I started my first business. I bought a six-pack of Coke for 25 cents and sold the cans for a nickel apiece. I also sold magazines and gum door to door.

Warren Buffett, Chairman and CEO of Berkshire Hathaway

Warren is right. But there’s something else Warren did that multiplied his success.

He learned what to do with the money once he got it.

(This is Part 2 of a 3 Part series.  In the Part 1, I wrote how the humble lemonade stand was filled with business lessons, if you know where to look. Today, I discuss what to do next, which is just as important. If you haven’t had a chance to read the prior post, I recommend you do it first, since it will help today’s post make more sense.  Read Part 3 here.)

Work Like Warren

I didn’t even know you could start a business when you’re young. Instead, I got a job.

Final period of class and all I’m thinking about is getting it over with. Bell rings. Everyday she waits for me: big boned, shiny complexion, a red head–my beach cruiser. Muscular handlebar to bear the weight of 70 Sunday papers. Sturdy wheels like an SUV. Spongy seat like a couch.

When the delivery truck comes and dumps the day’s news, I cut the plastic bands to loosen the bushel. Seventy I fold (in a 2-fold origami) like a letter. The others do a single-fold, like a taco, but the 2-fold helps me throw with greater velocity and precision. Twenty papers in and the ink smears my hand, drying it out. The rubber bands snap against my raw hang-nail. Smudged hands and hang-nails–the affliction of all paper boys and girls. Seventy I stuff, one-by-one into the double canvas bag. Seventy I lift onto the beach cruiser’s handlebar, front wheel between my legs to hold her steady. I wind the straps around the handlebar. No room for slack.

Weekdays start at 4pm. Daily Breeze subscribers wait until the evening to read the news. Saturdays and Sundays start at 4am. No room to slack.

I knock on seventy doors each month. Seventy similar single-story ranch homes, many dilapidated. Some knocks never answered.

I made seventy dollars on the 15th of each month. I bought a video game and donuts on the 16th of each month.

Manage Money Like Warren

Sean Combs, founder of Bad Boy Entertainment, was much more enterprising than me, making paper delivery into a business.

I just viewed it as a job, not as an opportunity. This job shaped my 7th grade view of money:  it’s hard to earn, easy to spend. Another thing I learned: some adults will actually bilk a kid.

Don’t let your child be like me.

Lemonade Profits

Congratulations! Your child just started his or her first business. They converted your money, lemons, sugar, and water into cash for themselves.*  What next?

I suggested in the last post to let your child decide how they wanted to spend the money they made. However, you can still frame the options so that the choice is pretty obvious. I give my children four options:

Spend it

This one wins the Kid’s Choice Awards (and many adults too). It’s ok that your child spend their earnings. It’s empowering to your child the first time they walk into a store to buy what they want with the money they earned. With my children, I suggest spending no more than $5.

Give it

If spending is empowering, giving is transforming (when done correctly). With my children, I explain how blessed they are to have good health and parents who love them. This is a gift from God. So is the money they made, as they were blessed to have kind people buy from them. This money can be used for things they experience, like giving to their church or school, or needs they can help ameliorate. (“The bread for communion? You helped buy that!”)  I suggest at least 10% of profits.

Researchers from the University of British Columbia found that giving away money makes us happier than spending it on ourselves. The Wall Street Journal writes:

In countries as diverse as Canada, South Africa and Uganda, giving away money consistently made people happier. This was even true when people were giving away their own money, and even when they themselves were relatively poor.

Save it

This is the prudent choice, and the one most parents suggest. Most of the time it goes into a piggy bank or even a bank account. It’s safe, and a portion of your child’s money should be allocated to savings. However, I almost never use the word “save” with my children, even though they are saving. To them, savings just happen; savings are merely what’s left over after the spending and giving. Instead, I focus on the next option.

Invest it

Casey’s mom asks, “Was it fun paying momma back on her investment? You made $30, but you only got to keep half. Do you want to do that again, or would you rather keep the whole thing next time?”

(To make it interesting, today we assume that at the last minute, Casey decided to give equity rather than take a loan.)

Your child now has money. They can now solve the working capital problem with their own money. Your child has moved, in a business sense, from a position of financial weakness to strength. Now move from strength to strength by investing back into the business (this is called “retained earnings”).

For example, if the cost of buying lemons, sugar, and cups were $10, and the sales were $30, Casey tripled her (mom’s) money in one day. However, since her mom is an equity investor (50% to keep it simple for Casey), Casey only kept $15, using the remaining $15 to buy out her mom’s ownership share.

Let’s See What Casey Does.

Casey now has $15. She spends $1 on a lollipop and gives $2 to her church. With the remaining $12, she buys more lemons, sugar, and cups. Lucky for her, she took inventory and realized she needs fewer cups. The total cost of the shopping trip was $8. She keeps the remaining $4 in her piggy bank. If she makes $30 again, she keeps the entire amount.

Did you follow that?

For the first lemonade stand, it cost Casey $15 to make $15. That’s a 1.0x return on her money.**  The next time, it costs her $8 but she makes $30. That’s a 2.75x return on her money!***  

Casey’s Lemonade Empire Cost Sales Profit Return
Lemonade Stand 1 $15 $30 $15 1.00x
Lemonade Stand 2 8 30 22 2.75x
Total $23 $60 $37 1.61x

Because they are diligent, Casey and her mom research savings rates and discover that no bank offers 275% return. Ever. So they get ready for the 2nd Lemonade Stand.

Next:  Lessons from the 2nd Lemonade Stand

*This is known is the Cash Conversion Cycle (CCC). The CCC for a lemonade stand is one day (assuming you shopped the morning of the sale). The CCC for delivering papers is 30 days, although you don’t have to buy the papers in order to sell them. Casey made $15 for a day of work. I made $70 for a month of work (although paper boys, if they’re still around, make more now). Can you guess which one is the better business?

**As you can see, Casey paid a high price to solve her working capital problem. Without it, however, she would not have been in position to invest in Lemonade Stand 2. In this case, she should have taken the loan.

***Ostensibly. We won’t know what will happen until the next post!

FREE Guide to Help Your Child Start Making Money Download

Reading about helping your child start a business is a good start, but the real learning and habit formation starts by doing.  I’ve found it helpful to have a quick, easy-to-understand guide.  Just fill in the form below, then click “Download” and I’ll send you the FREE guide!

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