The "family finance company" - An alternative way to fund college education

Look at your family’s financial resources as a “family bank,” a family finance company. What a great way to approach funding college!

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I was at a class: Truth Concepts Training taught by Todd Langford and his wife, Kim Butler.

Todd told the story of a wealthy man who had put his sons through a very expensive college. The school was the same that he and his wife had attended 30 years prior to their sons.

Now, 35 or 40 years after his sons attended, the father found himself in financial straits.

He had consumed all of his wealth and, past his earning years, he found himself pressed to ask his sons for assistance.

Not only was the request an embarrassment to the father, but, frankly, the sons were annoyed when he asked them.

“Why weren’t you a better steward of your funds?” they wanted to scold their father. “You were so wealthy, but then you squandered your funds away. And you want us to bail you out?”

Todd happened to find himself in discussion with one of the sons.

“How much did your father spend on your college education?” he asked.

“Oh. I don’t know. Maybe $140,000?”

“And how long ago was that?”

“Let’s see. Thirty-seven years.”

“Okay. So your dad spent $140,000 on you 37 years ago. . . . Did he ever ask you to pay that back?”

“No.”

An Alternative Method for Funding College

“Suppose that, rather than funding your education, your father had invested those funds for his own benefit?” Todd asked. “Now, I don’t want to be overly optimistic, here, but—do you think he could have averaged a 6% return on those funds over the years?”

“Well, I imagine!” said the son. “That’s not terribly aggressive.”

Todd plugged the numbers into a future value calculator. A hundred and forty thousand dollars at 6% return for 37 years. “What do you think such an investment would be worth today?” Todd asked.

“I have no idea!”

Todd turned the computer to face the son. “How’s $1.2 million?”

Point: Instead of investing in their education, Dad could have saved the $140,000 per son and put it toward his retirement instead. Two investments of $140,000 made about 37 years ago and earning only a modest 6% per years would be worth well over $2 million today.

“Maybe, rather than feeling put-upon by your dad, you could take this opportunity to help him out as a small thanks for the sacrifices he made in your behalf,” Todd suggested.

Better Yet . . .

My family and I have been looking at ways to create what some people refer to as a “Family Bank”—a practical and legal structure that will permit the family to fund its members’ financial needs and—like a “regular” bank—make a bit of money on the funds it lends.

A short while ago, I was listening to The Wealth Standard Radio podcast by Patrick Donohoe of the Paradigm Life group. As I recall, it was Donohoe who made a side comment about paying for college education.

The gist of the comment: Lend family money to those who want to go to college. Don’t give it to them.

There are several reasons to follow such a practice.

  1. It affirms (or reaffirms) that the money inside the family is a legacy. It ought not to be consumed . . . any more than the members of a farm-owning family should think it is okay for its members to let the farm decay, abuse the infrastructure, the equipment, the soil, the animals . . . or fail to maintain these resources of the farm.

Rather, just as a farm family expects the members who occupy that farm to improve the asset year by year and generation by generation, so, too, the modern urban family should expect to improve the family’s assets year after year and generation after generation.

  1. By making these kinds of transactions loans, the family makes clear to prospective college students that college is a business proposition. They had better have good, “business”-oriented reasons to attend . . . and plans for how that education is going to pay off . . . so they can not only pay off their loans, but move forward in life as well.
  2. This kind of transaction affirms to prospective students that they should be going to college for educational purposes. They are not there simply to party, play around, or “find themselves.”

Summary

“Your college education, O Son (or Daughter), is one of your last rites of passage to adulthood. And one of the truths concerning becoming an adult is that you pull your own weight. You contribute to the family and to the family’s fortunes. As you request this loan, and we agree to lend to you, the fact that we make this commitment to you—and you to us—demonstrates our mutual desire and commitment to help each other move forward individually and as a family. . . .”

One of the foundational principles of creating a “family bank.”