Updated on 11.20.07

The “Seed Money” Idea: A Different Way of Looking at Saving for Your Child’s Future

Trent Hamm

A few days ago, I had lunch with a person in the local community whose opinion I respect quite a bit. He has two adult children, only one of which attended college straight out of high school, and both of which run their own business.

What I wanted to know from him was how exactly he raised his children to be such independent, self-motivated, entrepreneurial people. What he told me really surprised me, and it made me think a bit about whether I should be contributing to my children’s 529 plans or doing something different for their future.

When the children were young (under 12), he paid an allowance for household chores. There was a minimum that had to be done to even qualify for the system each week – so they had to do a certain number of tasks just as a baseline. Beyond that, though, they could earn money by doing more chores: dishes, lawn care, and so on.

Meanwhile, he was investing in a mutual fund for each of the children. Each week, he put a small amount into their fund, intending to use it later to help them out.

On each child’s twelfth birthday, he sat down with them and helped them develop a business of their own that they could manage. One of them chose lawn care and snow removal, while the other one chose math tutoring because he was exceptional at math (and had already completed all of the math courses offered in the school district). He provided them both an equal amount of “seed money” out of their fund to get things started – one of them used it to buy a used lawnmower and a snow shovel, while the other bought a printer cartridge and paper to make flyers. He then guided them on their business, acting basically as a free business consultant to them. The only requirement that he placed on the business is that half of the money either had to be reinvested in the business or invested in something else – they could spend the other half.

In both cases, the businesses thrived. The math tutoring child wound up with significantly more in his fund than his brother, but the lawn care/snow removal brother wound up with a lot of equipment. Both learned quite a lot about how to operate a business.

On their eighteenth birthday, they were gifted their funds. After that, the parents provided no more financial support. The person with the lawn care business took that money, bought a lot of ads and some new equipment, and expanded the business. The son with the tutoring business finished his senior year, then went to school to get degrees in both business and civil engineering on a nearly full scholarship, then worked at an engineering firm for six years while that fund still grew, then used it to put out his own shingle. He now runs an engineering firm.

To me, there is a lot of appeal in this plan. It relies heavily in constant fostering of self-reliance and entrepreneurship in your children, but it also gives them the opportunity to choose education if they so wish.

This doesn’t change my desire to save money for my child’s future, it just makes me reconsider putting the money into a 529. That money has tax benefits if used for education, but an extra tax penalty on earnings (10% more than long term capital gains) if used for non-educational purposes. If you assume they’re going to go to college, a 529 is the right way to go, but if they wind up starting their own business right out of high school – which an entrepreneur might – a 529 is a hindrance as compared to a normal fund.

For now, I’ll stick with the 529, but the lessons learned from this man’s story will stick with me for a long time.

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  1. leslie says:

    If his kids are adults now, then he didn’t have the option of a 529 when they were growing up. I would be interested to know if he would have done something differently if he had had the 529 option. Obviously, this method worked out quite nicely for them but I am just curious if he would have done something else had he had the option. When he started investing for them he did not necessarily know what his kids were going to excel at and/or be interested in…

  2. plonkee says:

    Of course, it isn’t all or nothing. And even entrepreneurs can benefit from education.

    I think this guy’s plan was a little restrictive. Your kids may be interested in starting their own businesses at the age of 12, but they might already have a hobby that they enjoy and not want to devote the energy to a business instead.

    As you’ve discovered with the education (or not) funds, the best ideas have flexibility.

  3. Michael says:

    If the child’s business is successful, it will return more than the tax savings from the 529 would return. Such businesses are not really riskier than the stock market, just less liquid, and 529s are not risk-free since the laws governing them have plenty of time to change. Finally, your friend’s strategy pays a valuable, intangible return your strategy can’t match, even if all the businesses flop. That is worth more than a lot of money.

  4. Rick says:

    Who’s to say the capital gains tax will even be around when your kids go/don’t go to school. It may be taxed as ordinary income.

  5. Smart. Healthy. Rich. says:

    This is a great story Trent, thanks so much for sharing it. Since the recent birth of my son, I have been searching for ways to teach him about money. Obviously he is too young at this point, but in the coming years it will become very important to begin teaching him about money, and how to handle it responsibly.

  6. Minimum Wage says:

    Wish I could even think of having kids with my girlfriend, but with my financial situation, there is no chance of that ever happening – I can barely support myself let alone a child.

  7. Writers Coin says:

    Obviously it’s an abbreviated version of the story, but like plokee says it does come off as rather restrictive. Or pushy, in my own words.

    I like the fostering of the entrepreneurial spirit and the fact that the two kids took different paths is a positive, but I think setting these kinds of fixed rules are a little restrictive themselves.

  8. Jillian says:

    What a great idea, I love it! Of course it does rely somewhat on the nature of the kids, but I’m sure if they aren’t interested there is still plenty of flexibility in the idea. If you can learn how to make money from your hobbies at such a young age, you’d be pretty well set for life.

  9. Megan says:

    I really like the idea of saving for a child’s future outside of a 529 plan. When I was growing up, my mom and dad contributed $50 a month to a mutual fund for me. I always knew that I had this money and that it was for college, but I never doubted that if I wanted to be an artist, real estate agent, pro volleyball player…whatever, that I would be able to use the money to get me started. During college I got enough scholarships to pay for my first semester of college, but they were not renewable, so after that the financial burden was on us. Each semester, my mom sold off enough shares in the mutual fund to pay for tuition and living expenses once I moved off campus. After I graduated in May, she sold off the rest of the funds and gave me the cash to use as I needed (just under $3000). I turned around and deposited it in a Roth IRA…I guess she taught me a few things about saving along the way!

    My point is, while this man’s money lessons may seem restrictive to some, I’ve always thought that 529 plans feel restrictive as well. College isn’t for everyone, and thats quite a large penalty to pay if your child pursues other opportunities after high school.

  10. Diane says:

    When my oldest was 11 years old, she would take a shopping cart (Of the Old Lady variety) to a baseball field near our home and sell pop and candy to the spectators. After paying expenses, she made roughly $15 a night for about two hours of work. When she was old enough to work a real job, the concession job went to the next child and then the next. Only one of them has continued in the entreprenurial vein but it was a good experience for all.

  11. Training a child to be financially responsible is one of the more important lessons to be taught. The challenge is doing it in a way that keeps their interest (we live in a microwave – I want it now – world). I have found my kids (12 and 10) enjoy hearing financial success stories. If the story is interesting, they always have a lot of followup questions.

    Best Wishes,

  12. Peter says:

    (Sigh) one of the things many of these PF blogs push for is that everyone seems to “need” to become an enterpreneur to be successful. To me this is no different an example of pushing your kid towards a directed goal as pushing them to go to college.

    Hey, I told my kid they had to earn money, that it would be good for him. I let him pick something he could do and encouraged him and met with him regularly to demonstrate it was important to me as well as important to him.

    Hey, I told my kid he should try football, that it would be good for him. I let him play any position he wanted and I helped the coach at the games and me and my kid talked about practices and games every day on the way home.

    Hey, I told my kid he should go to college, that it would be good for him. He could pick any career he found interesting and I encouraged him and helped him with homework and became PTA president to show him I think education is important.

    You child will try to follow your expectations, specific or inferred. Offer a variety of experiences and let your child lead you to what they want/like/enjoy.

  13. Minimum Wage says:

    I think this is a brilliant idea. I think every kid should have at least one business stream of income by the time they graduate high school.

  14. Pierre says:

    I strongly agree with the encouragement to the entrepreneurship. My only objection would be that allowance for household chores. I strongly believe that every family member should contribute appropriately to its age (chores, cleaning, help with cooking, etc.) and don’t expect to be paid for it to get a sense what family is all about – be together and do things together. I would rather give a (low) flat fee allowance and promise to double every dollar not spend to teach the kids the value of saving / investing

  15. Eileen says:

    I too feel that this article is a little”all or nothing.” “If you assume (in italics) they are going to college.” Why not instead view it as keeping all options open? Isn’t all savings based on some assumptions and some guesses? Heck, why assume I’ll live to retire, some of my family members died prematurely?

  16. janewilk says:

    I know a family who sat their early teenage kids down and said that they would need to spend the rest of their middle school/high school years earning a portion of their college tuition. The daughter opened an organic bakery business (sold at farmers’ markets, at local restaurants, and catering events). The son decided upon lawn care/landscaping. The daughter is now college age and after her freshman year decided upon culinary school instead. The son is finishing high school this year. I’m not sure I would take this route with my daughter, but I’m not ruling it out!

  17. This guy definitely had the right idea. All children should be taught the value of money and giving them the challenge of running a mini-business is a great idea.

    I think it’s also a good idea to explain to them from a young age how their money is invested and the technicalities behind it.

  18. Golfing Girl says:

    When my daughter is older (currently 4) I will give her the choice of a part-time job like I had (bussing tables or working the grill at the golf course) or I will help her get her own business up and running if that’s her desire. I may even let her “partner” with me when I need extra help running my junior golf clinics.
    The important thing is teaching the value of a dollar (how hard and long I worked for the dollar) at the earliest age possible. I remember looking at jeans thinking, “Those are worth 6 hours of flipping burgers and slicing onions!”

  19. Kelly says:

    I’d be interested to hear from the sons’ perspectives; what was good, what would have been better, what was bad. Could you do a follow-up, Trent?

  20. Chef says:

    Developing a business plan at age 12? You have the rest of your life to spend chasing money, I’m glad my parents didn’t make me propose a business plan at age 12 – I was too busy playing outside.

  21. Stephan F- says:

    This is the same basic idea I have for our children. I have come to the current conclusion that if we are homeschooling our children probably won’t find working in a big bureaucracy as they won’t stand for all the BS. That means working at small companies or we can help them build their own businesses.

    At any rate if they fail at it when they are young the consequences are not bad at all. There is plenty of time for them to recover. A bit harder at 40 to start trying it.

  22. Rob in Madrid says:

    I sinply can’t understand for the life of me why everyone wants thier own business. Most people who so work for more hours than my wife for far less money. Working weekends and not having (paid) holidays doens’t appeal to me. Sure you get “tax” write offs but you have to first make some money! Thier is nothing wrong with being a wage slave and alot of advantages.

    Secondly all the stories I read of people’s school debts makes me question the wisdom of a degree. Is it really worth it if you going to graduate with 10s of thousands of dollars in debt. I’m not against school but it’s hard to get ahead when you graduate deep in the hole. If you save enough for your kids college than aren’t you short changing yourself in the long run?

    A much better alternative for many is trades. With a good trade you’ll never lack for work. Best part is you get paid to learn and you’ll never lack for work.

  23. George says:

    @Rob in Madrid –

    Because of my BS degree, I make $10-15k/yr more than coworkers without a degree. Because I take on responsibility that other degreed coworkers do not, I make about $5-10k/yr that they don’t.

    I’ve had this job for over 10 years and similar wage comparisons, so, yes, a college degree is worth as much as $70k debt.

  24. Kat says:

    Rob in Madrid-

    I had to have a degree in order to do what I love. So yes, the debt is worth it to me.
    Also having my own business is worth it to me. I love what I do. Sure it takes some planning for time off around the holidays, vacations,etc, but for me and a lot of others it is worth those headaches. Working for others has its own set of headaches.

    I, too, would also like a follow up from the sons point of view.

  25. !wanda says:

    @Rob in Madrid: If you are a good student and go to the right school, you don’t have to graduate in debt. I got a full-tuition scholarship for college. Yes, it was an expensive, $30k/yr school, but the scholarship was $20k/yr. (My parents had saved the rest, but I probably could have made up a good portion of the other $40k if I had worked during HS or chosen more lucrative summer employment.) Now, I am being paid a good amount, $26k/yr, to go to grad school and get my PhD.

  26. Anitra says:

    Why are so many people criticizing entrepreneurship at 12? I was running a “lemonade and candy stand” outside my house when I was 6 – and started a leaf-raking business with my best friend when I was 8.

    My entrepreneurship actually dropped significantly when I was in highschool, because my parents told me that school should be my first priority, and that they would provide me with chores to do if I wanted money.

    It’s funny, because money was never the motivating factor for me. It was more about the pleasure of a job well done and the success of doing it myself. But that meant that I did just as much volunteering as I did paid work. But I wish I had stuck with it. I easily could have tutored in highschool, and made enough money to get through my university education without debt.

  27. annab says:

    I think the key to this story isn’t which savings vehicle your guy used, but his mentoring/teaching to his children. If you take the time to educate and reinforce financial education with your kids, they’ll likely follow your example. If you take a look at precocious children, they seem to have either 1) a really involved mentor or 2) constant exposure to the field (cause their parents are in the same line of work.)

  28. ericks says:

    I’m of two minds on this. On the one hand, there’s something a little unbelievable about this story he told you. One kid who dives right into entrepreneurship after being forced to and starts a successful business, I’d believe. Two? Maybe. I just have a feeling this didn’t go as smoothly as he remembers.

    However, this story reminded me of when I was 7 or 8 and wanted to earn some money because I was making a rather useless allowance of 50 cents a week. I decided to offer wagon rides to kids, but couldn’t get a customer. I was shot down by one kid who said her mom told her, “If you were my friend, you wouldn’t charge me.” Well, that made me feel guilty, and my hour as an entrepreneur was over. I never pursued money-making on a serious scale again.

    I *did* have another business when I was a teenager, but it was much more a labor of love than a money maker, and eventually I pursued a career along those lines. I make a decent living, but I’m not rolling in dough.

    If this guy had been my dad, would my story have been different? Maybe he would have helped me start a business and supplement my allowance.

  29. Trent Hamm Trent says:

    I know the child who started the lawn business reasonably well – I’ll try to talk to him a bit and write a follow-up. I think the math tutoring business wasn’t as strong of a success, but I honestly have no way of really verifying that.

  30. Kristi says:

    I grew up with a friend whose parents used a system where their children did chores for money, then had to pay the parents for pretend expenses like their own rent, insurance, utilities, car payment, etc. Some also went to savings. They even went as far as having them help pay for groceries, gas, etc. This not only taught them about money, but just how to handle transactions at the store. Then what was left of their chore money, they got to spend on whatever they wanted. Of course they got paid more for chores than what would be considered normal, but most of it went right back into expenses. They were really just learning a lesson of work ethic. I asked her if as a kid she ever thought that she deserved to get paid for everything, and she assured me that while her parents did all of that, they also saw that she was involved in charity work through church and the community as well, so she didn’t grow up thinking that she always automatically deserved payment.

    I remember as a kid thinking it was cool and wanted my parents to do it too. My friend is now very frugal, very successful and using the same strategy with her children.

  31. 529 Plans are very flexible. It can be moved to different beneficiaries and/or nieces and nephews. Perhaps your children don’t go to school, but maybe your grandchildren will have additional educational expenses. I’d be surprised if it doesn’t get used at some point for a purpose that you completely approve of.

  32. Debbie M says:

    I think this idea is fascinating. I think it would help us get over some of our fears of starting at least side businesses that might or might not grow into full-time opportunities just so we’re more likely to see it as an option. Also we can learn some things the hard way when the stakes are very low. And it gives us more chances to explore our interests.

    I wonder what business(es) I would have tried.

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