Tuesday, December 13, 2011

'Tis the Season to Give Financial Gifts to Children

Christine Benz of Morningstar recently published an interesting article called "The Best Ways to Give a Financial Gift to Children."  The article has good information for different ways to give a financial gift, but I might not classify them as the "best" ways. The article really focuses on more sophisticated ways to give larger amounts of money without letting the child spend it - at least not right away.

The article proposes 4 ways of gifting to children:
  1. Set up a UGMA/UTMA account (Uniform Gifts/Transfers to Minors Act)
  2. Contribute to a 529 Plan (college savings account)
  3. Fund a Roth IRA (Individual Retirement Arrangement)
  4. Give a financial knowledge gift (a basic finance book)
The article explains these 4 strategies pretty well so I'll let you read it yourself.  But, I'd like to add three simpler options below:

First, a simple way to give a financial gift that begins the learning process about saving and investing would be to buy a simple US Savings Bond for a child. Specifically, I recommend the I Savings Bond that guarantees an interest rate that will beat inflation (thus, the "I"). You will need their social security number, but that is about it.  So, it's significantly less complicated than setting up UGMA, 529, or Roth IRA accounts. The child will learn the lesson of delayed gratification as you can tell her that the value of the bond will rise higher and higher the longer she does NOT spend the money.

But, you better hurry! You can buy US Savings Bonds at your local bank right now, but after January 1, 2012 US Savings Bonds will only be available electronically.  This will make gifting a bit more difficult as your gift recipient will need to set up an account at www.TreasuryDirect.com BEFORE you can make the gift.

Second, you can just take the child to a bank or credit union and set them up with a simple savings account.

Third, if you are not rich, there is nothing wrong with giving a child - especially a young child - a $5 bill in a card.  Then, take the child on a trip to the toy store to let them learn how money works. A young child will learn a lot just by being told "sorry honey, that toy is $8 and you have only $5, you need to pick something else," and "that toy costs $2. Do you want two and save a dollar for our next trip to the toy store?"

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