Beyond The Savings Bond: Better Ways To Gift Money To Children

Vanessa McGrady, Contributor, Forbes
May 18, 2016

My friend Ericka in Florida gave birth to a peach-cheeked bubbly baby girl a year ago, and one of her first gifts was a $50 savings bond from a well-meaning uncle. Of course, Ericka was grateful. Gifting a newborn or child with a savings bond is a classic way to introduce the concept of savings. It says, “Be prudent and patient, for someday this will blossom to its full face value. And you will be glad you have waited.”

Ericka wondered, though, if the money her uncle spent would work as hard dollar-for-dollar as other gifts might. She says it was a sweet gesture and still going to be put to good use. “But I definitely thought, ‘There’s got to be a better way to gift college money these days.’ ” She’s absolutely right.

“Series EE savings bonds are currently paying a 0.3% rate for the next several years—$1,000 will earn $3 at the end of the year. There is also a three-month penalty if the bonds are held less than three years, and you cannot cash the bonds if held for less than a year,” says Joe Franklin, CFP, president of Franklin Wealth Management in Hixson, Texas. “If held for 19 years and 11 months, the $1,000 invested in these bonds will earn $61.50. But if held for over 20 years, they will earn an extra $1,000. The only time frame worth looking at is 20 years and not holding any longer.”

Saving for college

A 529 college savings plan tops the list of smart ways to save because of the tax and investment benefits. The drawback, however, is that the child may not have the maturity to use the funds properly when the time comes, and may not attend college at all, Franklin says.

Another drawback to untouchable or restricted accounts, points out Curt Weil, a financial planner in Palo Alto, Calif., is that children don’t actually learn how to save, invest and spend wisely. He suggests 10 percent be used for fun, 10 percent for charity, and the rest for savings.

“In my personal and professional experience, U.S. savings bonds are a pain in the posterior, and not very rewarding over time, ” Weil says. “A new savings bond is worth about three-quarters of its face value. I wouldn’t retain savings bonds for any reason unless it were more than a thousand dollars.” 

All states have a Uniform Transfer to Minors Act that allow a parent or guardian to set up an account for a child, with an adult as trustee. “The best reason for such an account is to begin teaching the child about saving, and perhaps about tithing/charity, and interest and compounding,” Weil says.

Funding dreams and experiences

Slipping a kid a check or cash for a gift is certainly easy—it saves on shopping time and ensures the child can spend it however he or she wants. Issues arise, however, when there’s not enough communication around the intent for the gift.

We had a situation in our own family in which relatives routinely gave a young child a check, intending for it to go into a savings or college fund, but the parent who was handling the money thought it more practical to spend it on the child’s clothing and ballet and swim lessons.  Nobody was wrong, of course—they just had different ideas on what was most important to do with the money at the time. To ensure the money would go toward savings, the relatives could set up a 529 plan of their own (which could also be used for other children in the family) or deposit directly to an existing 529 or other savings plan set up for the child.

Another way to avoid misunderstandings begat by vagueness is to pay directly for whatever you’d like to fund—writing a check to a music teacher directly, for example, or giving a gift card for a bookstore.

As the child grows older, you can work together on goals.  If it’s a car or another large purchase, you can set up a crowdfunding site and watch savings grow. You can also create a “family wallet” via Oink, which is a free online interactive site that allows parents to set up an account for their children to manage and spend how they choose. The child checks out using only their Oink credentials (never sharing sensitive information such as name, address, or credit card numbers).  Once items are checked out, the parent receives an alert informing them of the purchase. The purchase is only complete if it meets all of the pre-set parental limits.

Beware gifts that require maintenance

Sometimes you don’t realize there are strings on the gift you’ve given—think about handing over a puppy without regard to its vaccinations, supplies, food and medical care.

Franklin has a neighbor in his 20s whose parents bought him an expensive new home that he shares with his girlfriend. The problem here, Franklin says, is that the young man’s income can’t keep up with his lifestyle. “Just furnishing this and the upkeep alone is probably going to eat up most of the kid’s cash flow and keep him from being able to save for the future,” he says.

And of course, there comes a tipping point for bailing out your babies time and time again. “Providing economic outpatient care can very well keep your children from ever growing up and becoming self-sufficient individuals. I would tread with caution,” Franklin says.

This article was written by Vanessa McGrady from Forbes and was legally licensed through the NewsCred publisher network.

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