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Raising Your Children as Good Entrepreneurs

We all grew up with the notion of ya go to school, get good grades to get a good job and EEEEVRY THING will be hunky dory.

Somewhere along the way that plan stopped working and as we grew older, we let our dreams die. They system’s purpose is to generate good employees. In the industrial revolution, we needed good employees for the factories and growing companies. Before that, we were mostly entrepreneurs and farmers. Good employees are obedient and willing to work hard at projects given to them by someone else. They accept the cap on their income in exchange for the illusion of stability, predictability, and routine. They trade their time (a finite limited resource) for money (an infinite resource). So how do you raise your children to be good entrepreneurs?

Good entrepreneurs are a different breed altogether. They are either born with it or the spirit is developed. Some may argue that we are all born with it and society and the system beats it out of most of us. Creativity? Check. Self-discipline and motivation? Check. Independence? Courage to take calculated risks? Ambition to change the world? Check, check and, check.

As we raise our children, which character traits do we want to instill in them?

Naturally, we want to raise children with integrity, perseverence, honesty, generosity and so on. Here’s the thing: Most parents instinctively try to “manage” their children. They try to make them obedient, predictable. Look at what happens in the schools. Does the word – Ridlin ring a bell? Generally speaking, I think we are medicating our children into conformity and destroying the creative and curious spirit out of them. They give them an allowance, often tied to chores, and if the children get too “unmanageable,” the parents give them projects to keep them busy or these days, the children are just in front of a small screen…

In doing so, they raise good employees, who go out into the world ready to be managed by someone else and waiting to be told what to do and how to do it.

Don’t get me wrong—everyone should be an employee at times in their life. Sometimes you need the skills, the network, the money, or the experience that best comes from working for an established employer. It can establish a work ethic and how to work with others collaboratively for a common goal.

But some parents raise their children with a different mindset, an extra toolkit. These children grow up to be movers and shakers, and while they may work for others at times, it’s part of a greater picture in their life goals.

If you want to raise your kids to be good entrepreneurs, not just good worker bees, here are seven tips to prepare them for great things!

1. Teach them the value of a budget.

Most adults struggle with budgeting, yet a six-year-old can manage a budget if taught properly.

Why do most adults struggle? Because no one taught them how to do it properly. Where do we learn about money? The banks, who market to us to get a loan at a high interest rate and a savings account that pays us .02%. They want us to invest in wall street but won’t loan against it the way they will with Real Estate, yet the financial gurus say that Real Estate is too risky.

Parents mess this up in all kinds of ways, but the most common is that they miss the most important piece: expenses. Budgets come with two columns, revenue and expenses.

And guess what? Revenue is the easy, fun part. Managing expenses and savings, on the other hand, proves a little messier.

Most parents just give their kids an allowance and call it a day. But if you want to teach kids budgeting lessons that are useful in the real world, you need to impose real-world expenses on your children—housing expenses, food expenses, entertainment expenses, and so on.

“What?! You want me to charge my six-year-old rent?! What kind of monster are you?!”

Imagine the following scenario: You start your child with a $20/month allowance, in exchange for X, Y, and Z chores. Of that, they’ll need to pay you $5/month in rent, $3/month for groceries, and a small percentage of entertainment costs that they request, such as dinners at their favorite restaurant, or going out to movies they want to see.

They also must save a bare minimum of 25% of their income. Whatever’s left, they can spend as discretionary income. Reinforce the habit to save early and often!

Don’t just deduct the expenses from their allowance, either. Make them pay you separately and specifically for each expense; perhaps different expenses are due at different times of the month.

Budgets have expenses, not just income. If you want your kids to grow up knowing how to manage their money in the real world, you need to teach them with a budget that resembles the real world as closely as possible.

 

2. Behold The Power of ROI.

When your children have mastered the science of budgeting – around age 8, it’s time to show them that their savings is good for something more than just looking pretty on their bank statement. (And they should have bank statements—show them early that money is not green paper, but an idea.) And eventually teach them better places to invest than a savings account for a much better ROI.

At first, you’ll need to rig their returns to demonstrate a point: When they put their money to work for them, they get more money. And the more money they save and invest, the greater their returns.

Suddenly, instead of 50-60% of their income going toward expenses, they’ll discover that returns on their investments can cover a big chunk of their expenses. They magically have more money every month! And they didn’t even have to do chores for it! This also teaches them the concept of paying themselves first. This lesson is probably the most valuable to learn and have engrained at an early age.

To make sure they earn a good return, have them invest their money with you as a private note that pays high returns. (Hopefully they’ll also gain a new appreciation for your real estate investments, since their money is now tied up in them!)

After the initial lesson sinks in, phase down the note returns to be more realistic, and have them start investing in real market investments alongside you. Have them invest in low-cost index funds as an easy—and historically effective—investment. You can watch the fluctuations together and talk about why the market moved the way it did.

Still, as important as it is that they start understanding markets, the most critical lesson remains the power of passive income.

3. Hone The Skill Of Flexibility & Mental Agility.

According to one Canadian study, nearly two-thirds of today’s elementary school children will work in jobs that don’t exist yet.

Likewise, many of today’s jobs will no longer exist in 10-20 years.

Our children need to grow up with excellent soft skills. They need to know how to work well with others, how to influence those around them tactfully but not rudely or aggressively. They need to know how to communicate persuasively, both verbally and in writing.

Teach what you can about networking, debate, public speaking, critical thinking, logic, negotiation, writing, data analysis, charm, and social graces. Help them find other people and places that can teach them these soft skills—since you can’t teach them everything.

Do whatever you can to encourage and develop their lateral thinking. Lateral thinking is about approaching problems from multiple angles to find effective and creative solutions. You know how corporate types are always waxing on about “thinking outside the box”? That’s lateral thinking, and it will serve your children well over their lifetimes, no matter how the economy or job market evolve.

4. Start Them On Their First Entrepreneurial Adventure.

Allowance is great for teaching budgeting, but it teaches nothing about entrepreneurship. Plus chores should be done as showing support for the household and taking care of where we live.

Have them, create a lemonade stand, or mow lawns or walk dogs for neighbors.

These are a great first gig, if you live in the right kind of suburban neighborhood. In fact, you can even tie in your children’s venture with your rental business

Push your kids to do something similar. At first, they’ll complain about working on their weekends, then they’ll discover how much they like the extra money.

And eventually, they’ll start to get bored of the work. This sets them up for the next lesson: leveraging other people’s time and money.

5. Teach them about leverage. | Ages 12+

When your kid is bored of their business venture, you can start nudging them to use a little lateral thinking. Consider this conversation:

“Dad I’m sick of mowing lawns every weekend.”

“Understandable. I can relate to how it feels like you own a job rather than being an entrepreneur. What are some ways you could cut down on the number of hours you work, while still bringing in the same money?”

“Huh? How’s that even possible?”

“Spend tonight woring on coming up with ideas, and let’s talk again tomorrow.”

The answer to the riddle is, obviously, that they bring on an “employee.” They leverage the time and talent of someone else. Your child has established a customer base of neighbors whose lawns they mow, and they know what they can expect in revenue each week. Now it’s a matter of finding another child (perhaps slightly younger) who’s willing to work for less.

Congratulations! Your son or daughter just got promoted to manager, who handles sales and marketing but not the actual labor. Even better, they can now expand their enterprise since they are no longer limited by their own time constraints. The big lesson they learn is that their time is better used on other tasks like getting more customers rather than the mundane day to day operations. by themselves, they could only mow so many lawns, do so much yard work, etc. With employees or sub-contractors, they can do a lot more AND they are helping more customers as well as providing an income for others.

Then, they quickly run into another constraint: physical resources. In this case, there’s only one lawnmower.

Your conversation could then turn to “what’s the constraint holding you back from bringing on more customers?” When your child comes up with the answer (equipment—the lawnmower), have them start scouting yard sales and classifieds for used lawnmowers. They can also learn to borrow or rent equipment rather than buy it.

Offer to lend them the money for a second lawnmower (with interest) to demonstrate that not only can they leverage other people’s time, but they can even use other people’s money to scale their business. I do this with real estate investing. I never purchase a rehab project with my own money or put it in my own name. I leverage hard money lenders and private lenders. This leads to the next step.

6. Partner On a Real Estate Investment.

As we talked about earlier, your kids have already been lending you money as a private note for your real estate investments, right? Well, now it’s time to bring them in as junior partners. Teach them to create their own llc and set up a business account for their business entity and teach them the importance of conducting business and taking payments through the business rather than personally. (Speak with your CPA).

Bring them with you to scout potential investments. Have them show vacant rental units alongside you to potential renters. Explain how cash flow works. Model for them how to raise money, how to manage people and contractors, and how to evaluate risk.

If you’re handy, this is a great opportunity to teach them about home repairs. If not, you can both learn together, giving you even more to bond over. This is a great skill for your personal residence, however, I teach my children to hire experienced contractors for investment properties as my time is more valuable and better spent doing other things.

Your children should have some of their own money in the investment with you, however little. Otherwise, it’s not a partnership; it’s a tagalong.

And when you sell or lease the property, your son or daughter gets their cut. They get to see the fruits of their labor.

You can even invest in properties to help pay for their future college education! I learned about this through Mark Kohler and Matt Sorenson in my education program.

7. Know The Rules Of The Tax Game.

One of my favorite movie lines of all time is Walter ranting, “This is not ‘Nam. There are rules!” in The Big Lebowski.

And so there are, Walter. So there are.

Life is filled with rules, but some of the most important that your children need to learn are the rules to winning at the tax game.

Have you heard about the 2 tax codes? One for the rich and one for the poor? Well that’s a lie. There are two tax codes, but they are for employees and the other is for business owners.

It’s hard to succeed if the government takes 50 cents of every dollar you earn. But when you layer on federal, state, and local income taxes, payroll taxes, sales taxes, property taxes, and all the other taxes that slip into your wallet, we end paying a massive percentage of our income to taxes.

Most of us don’t even know it. Here’s a simple example: If you rent, you’re paying property taxes; you just don’t realize it because it’s indirect. Renters actually pay those taxes twice since they end up paying the property taxes themselves and also pay income taxes on that money.

Homeowners, by contrast, at least know they’re paying property taxes and don’t have to pay income tax on that money.

Real estate investors who hold their properties for at least a year pay the lower capital gains tax rate, rather than full income taxes. Real estate is the only investment that I know of that allows depreciation while it generates cashflow. The average rental depreciates around $8,000 a year even though in generates positive rental income. Whaaat?

Many of the costs of owning and improving investment properties are also tax-free. Some exist more as paper losses than real losses, such as depreciation. Property owners can 1031 exchange their profits from one sold property to a new acquisition, and postpone profits indefinitely. We have a class on using 1031 exchanges as well. it’s one of over 58 courses.

The list goes on and doesn’t just extend to real estate investing. Savvy investors know the rules for limiting their tax liability on everything from stocks to ETFs to private notes.

Who’s going to reach financial independence faster, someone who’s losing 50% of their income to their total tax burden or someone who’s only losing 25%?

The better your children know the rules of the game, the greater their chances of succeeding.

Leave The Rat Race to Other People’s Children

Most people don’t like their jobs. It’s a sad statistic: 70% of Americans feel disengaged from their jobs.

If you want to give your children the means to succeed in tomorrow’s economy, resist the urge to keep them obedient at all times. Embrace it when they (respectfully) question authority and assumptions. Encourage them to think laterally. Help them build skills that will always prove valuable. Teach them everything you know about money, investing, and entrepreneurship.

Remember blacksmiths? Well, OK, I don’t either, but most towns had their own blacksmith in the 1890s. By the 1920s, there were few blacksmiths left in America. The economy had moved on, and instead of jobs for blacksmiths we suddenly had jobs for car mechanics, car salesmen, car manufacturers, car washers, and so on.

Today’s world is changing much, much faster than the early 1900s. When the robots come for our jobs, your kids will be in a position to not only survive but capitalize on it, rather than lament the loss of yesterday’s jobs.

And don’t even get me started on the begging for a day off, strategizing the sick days and navigating the office politics like your in Game of Thrones. Hopefully, you’re not Edward Stark.

And that’s the best thing you can offer your children: the agility to succeed no matter what comes down the pike.

What are you doing to raise your kids to think differently? To be independent, entrepreneurial, ready for a rapidly-changing economy?

Perhaps it starts with a great example from their parents? Children and others as well are paying attention to our actions more than our words, and they will remember what we did in a situation longer than what we said about it.

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