The reason why I wrote this post is to address the idea you should start a business to make money. That shouldn't be the reason. Don't count the hours and think about getting money for hours worked. As a contractor or freelancer, you can charge your clients by the hour. As a co-founder, you should forget the hours. You're doing it because you want to change the world. No one in their right minds or logical minds should start a business to get rich, unless you're bad at math. Or really desperate.
Here's the analogy.
Having a business is like having a child.
To me starting a business is like having a child. First, you need to find the right partner to begin the journey with. A person who you admire. A person who excites you. A person who respects you back and someone you have chemistry with and can spend hours and hours with. A lot of times your partner is found by chance. Much like finding a husband or wife, you can find your partner through your social networks, through work, online, etc.
Benefits of having a child. Anyways, you find someone and decide you both want the same thing and are willing to dedicate the most valuable possession you have on this pursuit. So you have your kid. Hopefully, this kid can provide for you when you're older. That's called Return on Investment (ROI). A lot of Asian parents believe in this ROI myth.
The other benefts of having a kid is you get to live forever. You are effectively your DNA. Your children are comprised of your DNA so it is you and your partner immortalised. Unless, your kid dies or can't reproduce. Just like a company can live on long after you die; a company is the founders' legacy.
The final benefits of having a child are happiness and a sense of purpose in life. To have a child is to know love at its ultimate form. If you think you know love because of your parents or romantic partner, wait until you have a child. It is more than anything you've ever known. From what I've heard it's like "letting your heart walk around outside of your body." Some say children bring purpose to people’s lives just as some say entreprenurship gives life meaning.
The Financial Return on Investment of having a child.
Cost of Investment.
Let's see if it makes financial sense to create a human child. Let's analyse this investment vehicle.
In the UK, it takes £218,000 on average to raise a child. That's about £10,382/year. In the USA, it cost $300,000 to raise a child until age 18 (full report). Some parents pay for college. If you do that would be $38,500 per year on average for a private college. College Board finds that in 2011-2012, the annual average tuition and fees were $28,500 at 4-year private colleges and annual room and board was $10,089. So let's not pay for their higher education.
My old boss joked (I'm assuming it was a joke) how he's going to track all the money he spends on his child and make his kid pay him back. I thought that was an ingenious idea, if only to shove at their faces when they try to talk back.
Ok, sweet. You're down $300,000. Let's see how much we can make back!
PewTrends finds only a quarter of adult children are providing financial care assistance to a parent:
While most adults believe there is a responsibility to provide for an elderly parent in financial need, about one-in-four adults (23%) have actually done this in the past year.
MetLife's research institute confirms:
The proportion of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years. Currently, a quarter of adult children, mainly Baby Boomers, provide these types of care to a parent.
Ok so what does that mean? Basically, right off the bat, you have 75% of your investments defaulting. Kids are worse than subprime. Kids are truly a toxic asset class.
So you keep your expectations low, okay?
It's going to take your baby a lot of time to make some money for you. And the median household income is $50,502 in 2011. Given that it's likely the household has two people, let's say it's $25,000 per person. Reality test: The overall median personal income for all individuals over the age of 18 was $24,062.
Let's say yo baby gives you 25% of his or her income for 13.5 years. That's $84,375.
Congratulations, you've lost $215,625 on your investment.
Oh wait. We need to account for the 75% of kids that don't provide care for their parents. So the expected return is actually 1/4 * 84,375 or $21,094. Hot dog!
Hold on. That's actually $21,094 for you and your spouse. Your personal expected return on having a child is a grand total of $10,547. Since we're assuming you're married, we'll just sum your payouts together then substract your combined investment of $300,000. This leads to a $278,906 net loss.
But that's not all.
Time value of money.
The average age a mother has a child in the USA is 25. You retire at age 65. So that's 40 years. Did you know one dollar 40 years ago is now with $5.24?
So since whatever money you're getting now is worth less, you're actually only getting 19 cents now for every dollar you're expected to get 40 years in the future (assuming historic trends by using the 5.24 multiplier).
Your baby's promise to hit you back on the first doesn't sound that good now. As a econ/finance major, I know my calculations are really crude but the point is still valid.
Why it's not even close.
Life expectancy in the USA is 78.64 (source: World Bank) so that's about 13.5 years you need to account for assuming you retire at age 65.
Well that's not fair you had to spend 18 years raising your kids and then they continue to pester you for the rest of your life. In fact, nearly 60% of parents give financial support to adult children. And sometimes yo babies even have mo babies just so they can make yo babysit yo babies' babies. The nerve.
And even worse, studies show:
Family financial transfers flow mainly from ageing parents to their adult children: Nearly one-quarter of older households have given large financial or material gifts (worth €5,000 or more) to their children in the last ten years. In contrast, only 9% of older adults have received financial transfers from their children.
How much do you need anyways?
Given it's not fair you have to spend over 18 years looking after them and they only spend 13.5, how much would yo baby need to provide to cover your costs?
For the sake of a simple calculation, say you live in a nursing home. It's an average of $80,000 a year. You're going to need $1,080,000 from your kid. Now, not in 40 years by the way.
So unless yo baby's name is Beyonce, it's unlikely you're going to be getting a MiniCooper or a house from yo baby any time soon.
Having a kid like starting a business is a stupid idea, financially. So don't do it for the money. And vice versa.
So strictly financially speaking, having a child means a huge negative ROI. And that's not even counting the hours spent changing diapers, years upon years of doing maid service, performing cook duties, etc.
Sometimes I wonder how we continue as a species. But then again... $139,453 is a small price to pay for a chance at immortality.