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529 Plan Updated

26 Sep

My 529 plan was originally posted in March of 2013. In my example here, my daughter would have the original 5 head paid off at age 3.  As an update of how well this can work, my daughter has 8 head fully paid for and a few hundred dollars left over.  The cattle market has been extremely generous this year, making our original investment of just over three thousand dollars in February in 2011 worth over ten thousand dollars today.  I seriously doubt anyone has a college/future investment plan for their kid that has done this well.

In all fairness and objectivity, I am fully aware that this bull market will not last, and the value of her cattle will drop. Even so, she has added three more head than projected, which will generate an income even in the bear market that will come someday.

I also mentioned that the cattle biz will help me teach her life lessons. My buttons pop off my shirt as I swell with pride over how much she knows already.  Most of that knowledge coming from her just being around and observing me.  Seeing as how I have seniors from K-state and UNL calling me now seeking advice on everything and anything to do with the cattle biz, I’d say my little girl is way ahead of the curve in more ways than one.

Her lunch is there on the left.  She is following along during the sale with barn card and pen in hand.  Still a bit young for a cell phone

Her lunch is there on the left. She is following along during the sale with barn card and pen in hand. Still a bit young for a cell phone

cat walks provide the best view.  From here she can see all the action in the yard.  This can provide entertainment for quite awhile

cat walks provide the best view. From here she can see all the action in the yard. This can provide entertainment for quite awhile

 

 

The original post:

Ever since I was a little kid all I wanted to do was farm and raise cattle. Everything seemed so simple back then.  Just grow up and do what you want to.  We all had that dream.  When you get older, and especially when you have a kid, things get real.

 

In the last year and a half I have spent way more time in the lawyer’s office and CPA’s office than I care to in a lifetime. I did not get into the cattle biz to learn all about LLCs, Trusts,  payroll taxes and crap like that.  Thing is I do get to do one money/parent thing I love.  Invest in my kid’s future with nothing other than cattle.

 

A couple years ago I got fed up with the stock market, and pulled all my money out of my Roth IRA, and used the money to buy cattle. I’ve had a 20%, or better, return on my money since 2005 with cattle.  My IRA never did that.

 

So here is my thinking. As a parent it is always a concern of how to pay for college, even though I would not recommend college, or how to at least give our kids a good start.  After Bernie Madoff ,  John Corzine, and computer generated trades I do not trust the markets.  Thing is I know cattle, so I stick with what I know.

 

Here is what I’m doing for my kid. The numbers are based off my last trade just last week.  I know the cattle markets will move so for this example I am going to freeze these numbers for the next 18 years.  Thing is even in the last 8 years I’ve still managed to make a 20% return.  Keep that in mind

 

I market my cattle on a real time cash flow reckoning, so this allows me to always buy back replacement cattle at a profit. You will need to learn how to do this in order for what I am about to outline for you to work.

 

So when my daughter was born I bought her five head of calves. In this example I am using 480# heifers at $1.43 or $687 head.  So five head would cost a total of $3385.  We are going to back ground these heifers and resell them, and replace at a profit.  So in this example we are selling 730# at $1.33.  My real cost of gain is $.93 with a 2.75# ADG so when I add on a 20% return my cost of gain goes up to $1.15.

 

The 20% return is a $55/head profit. Buying 480# calves and selling them at 730# with our rate of gain we get to turn 4 times a year.

 

Now those first five calves I bought for my daughter are financed through the Bank of Dad (BoD). So when we do our first four turns in year one the BoD collects all $1100 of profit and subtracts it from the $3385 that was loaned to the new baby.  At this pace the kid pays off the first 5 head by age three and has $84 left over.  After this point we make the kid reinvest their profits into buying more cattle.  So after four more turns the kid will have enough saved up to buy 6 calves.  I think that would make for a pretty proud four year old.

 

Now I am going to assume you see the pattern here and I don’t need to do all the math for you and show you the year by year turns.

 

By age ten in this example the kid will have 37 head. Since there was an income for a minor dad paid the taxes for them.  By now I figure it’s time to secure voter registration, and make the kid a tax payer.  Ouch!  So just figure between Fed and State tax kiss 15% good bye.  Gotta pay for the roads we are using to haul these cattle.  Long before we get to this point, a responsible parent is having/helping the kid pay bills, and balance a check book.  Lots of lessons to be taught here.  I have a buddy doing this with his kids, and it helps them to see there is a purpose in learning math in school.  Also all the lessons that come from helping, do chores.  Some real character building here.

 

Now by the time the kid is 14 we stop adding more cattle. We stop at 75 head.  That is enough for a pot load.  Also when we stop at 75 head after the first turn we have the rest of the year to do the other 3 trades and save money.  At 14 what kid doesn’t want a car?  So, let them buy one with their own money.  They will have enough.  Also let them pay for some gas, tax, title, insurance and so on.

 

Now after the car is paid for with cash, we have a decision to make. Do we just hold it here with 75 head, or do we keep buying more?

 

For my example here I stopped at 75 head and just started saving money.

 

By 18 the kid will have 75 head of cattle worth $72,000 and saved $39,000, and spent $35,000 on car, gas and so on. So our original investment of $51,500 turned into $146,000 in 18 years.

 

Now I know the doubting Thomas out there is thinking well you didn’t figure feed and so on. That was in the cost of gain and subtracted from the dollar difference between selling the 7 weight and replacing with the 4 weight.  Leaving us with the $55 retained profit.  And it took 14 years to get up to a load lot.  This is a crockpot not a microwave.

 

Now what if we took that $51,500 and invested it into a 529 over 14 years, and stopped and then just let the interest compound for four more years until the kid was 18. At a 10% rate of return we would have $169,000.

 

I really think cattle can compete with a 529, IF you market correctly.

 

This is what I am doing for my kid. Now according to this example the 529 out performed my cattle plan.  Thing is the 529 didn’t give a sense of accomplishment, or ownership like the cattle do.  The 529 didn’t teach responsibility of paying bills, buying and caring for a car, and cattle, managing cash flow, or understanding where money comes from, and marketing skill.  The 529 didn’t teach the kid how to run a business, and looking at how many animal science and ag business majors corkscrew operations into the ground college didn’t teach that either.

 

So when my kid is 18 there will be three choices to make. 1) Go to college, keep the cattle and hire dad  to take care of and manage it and use the income for school, or sell them off and go to school, with the goal of graduating debt free.  2) Sell them off and pursue something else.  3) Continue to do the cattle thing.  And I can tell ya with a track record and cash flow like this even at 18 a banker will finance the youngster, with daddy’s supervision of course.

 

Now suppose I’m half right. And after 18 years you only have a net of $70,000.  Still pretty damn good.   What if I’m half wrong and by 18 you have $300,000?  Wow!

 

My kid is two and already owns 6 calves all on her own. But she gets to take advantage of my buying power too.

 

Dave Wright President of Independent Cattlemen of Nebraska (ICON) said something to this effect once “I raise kids, the cattle are there to help me teach them life’s lessons”

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2 Comments

Posted by on September 26, 2014 in Uncategorized

 

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2 responses to “529 Plan Updated

  1. Pat

    November 18, 2014 at 7:20 am

    I understand what you are trying to do and what you are trying to teach to your daughter, but it is a little silly to pretend that your daughter is some type of apprentice cattle baron at age 2. You are buying and selling commodities in your daughter’s name–she is not making the transactions. You are.

    I have no doubt that you will teach her many valuable life and business lessons in the future. But let’s stop pretending that your 2-year-old is some kind of commodity trading wunderkind, out chasing new markets and analyzing margins.

     
    • mrcattlemaster

      November 18, 2014 at 11:34 am

      Pat, you are right. It is silly to pretend. That is why the language I used included the words I, me, and our. In the real world no auctioneer is going to accept a bid from a two year old. No bank is going to issue checks to one either. I can not walk out to a pen and point at a clf and tell you its hers. They all wear my brand. See I have run into a differnt problem. Its called the “kiddie tax”. I discussed this plan with my lawyer and accountant, and if I were to give her, her own bisiness at her age she would be subjected to it. These things are why it is up to me to do them. Just common sense. Kind of like an actual 529 it is up to the parent to execute. When I get to the point in this posting where she is an adult, and she gets more financing from that bank, I made a comment she would have no problem getting it with my supervision. So even when she is a young adult I plan to kinda keep a thumb on it. I think I communicated that clearly enough.

      I appreciate your kind words on my parenting ability. Since this was origionally posted a year and a half ago my kid has grown up a lot. She sits in sales with me on a regular basis. She will be 4 soon and I do let her bid on cattle now. Of course I am using nonverbal communication with the auctioneer and I aslo whisper in my girl’s ear to “hit em” when its her turn to bid again. She has developed an eye for when cattle walk into the ring. I left her sitting with a buyer I employ while I ran into the office to get a recap. When I came back he told me how she instructed him to “hold” certain calvies then turn around and buy them at a discount. This got overheard by other buyers and now the poor guy gets some ribbing from time to time about it. There are people that have been in this biz for 50 years that can’t spot what she can. She understands the concept of “push em out and pull em in”. What I’m doing with her at her age is laying a foundation. The thing that makes her a wunderkid is how much she grasps for her age. That is what puts her ahead of the curve. The fact that her preschool teacher has no clue what to do with her and mentioned an early entrance exam for Kindergarten makes her a wunderkid. The fact that commodity trading has been around since Kane and Able makes it over 6000 year old profession so I don’t think any of this marketing is new as you suggested. She doesn’t yet get that we need to take the pruchase price and multiply by the weight to determine what it actually cost us. She just knows that there is a lot of math involved. Seein me do all this math has made her curious to learn, so at age 3.5 I started teaching her simple addition. Most kids her age can’t even write their name, and mine does work sheets.

      Listen, I don’t know if any of this makes her a wunderkid. Maybe she’s just a product of her environment. A wunderkid growing up in Cleveland probaly is showing signs of skills and thinking a touch different than my kid is showing. The point is, which you seem to have missed, is this blog was aimed at pointing out how bennificial the cattle biz can be, both financially and develpomentally, for our kids. Most everybody sells this biz short.

       

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