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Cattle 529 Plan for Funding College

Editor’s Note: Doug started this savings plan in 2012, and those are the number shown. If you’re starting now, you’ll just adjust them to what the market looks like now.

529 plan definition

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 stuff 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.

The Math

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.

Dougs529PlanNow 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, and doing 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 the 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”

November 2014 Update

Doug's daughter's 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
Doug’s daughter’s 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

My 529 plan was originally posted in March of 2012. 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. Since this was originally posted in 2012 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 also 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 calves 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”. She doesn’t yet get that we need to take the purchase price and multiply by the weight to determine what it actually cost us. She just knows that there is a lot of math involved. Seeing me do all this math has made her curious to learn, so at age 3.5 I started teaching her simple addition.

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

What I’m doing with her at her age is laying a foundation. 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.

Have you got other ideas or suggestions for building your kids’ futures? We’d love to hear about them in the comments below!

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Doug Ferguson
Doug Ferguson
I have gained many useful skills and knowledge working on various operations. These operations ranged from a sandhills cow/calf ranch, a custom feedlot, a hog operation, feed mill, and even a dairy. While working for others I saved up money to start my own cattle operation. One day, when I was in my mid-twenties, my operation grew big enough that I no longer had time to work off the farm. As my operation grew I realized I was growing with it. To accelerate my personal growth I decided to seek out people who were the best in what they do, and learn all I could from them. I still continue to do that. Over time it became obvious that my hedgehog concept, the one thing I excel at, should be starting calves. The marketing, stockmanship, grazing, and business skills I have learned have helped me to grow my backgrounding/stocker operation.

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