You’ll be hearing a lot about great gift ideas in the next couple weeks—and money geeks like me will stress the importance of not overspending, and possibly of making your gift a financial one that will keep giving for many years. There are dozens of clever and useful financial gifts, ranging from a few hours of paid time with a financial adviser to money manager software like Quicken or Moneydance or a subscription to Money magazine. But here are my four favorites:
Piggy bank This stalwart remains a vital financial education tool for youngsters. Piggy banks come in many shapes and sizes and kids can hold one in their hands; they quickly grasp the idea of taking a coin and dropping it in, and watching their savings build with regular contributions. Consider pairing this gift with the beginning or a boost of weekly allowance, and a short discussion of near-term savings goals like their next video game or bicycle.
Consider also giving three piggy banks and labeling them for spending, saving and giving—and have your child allocate some portion of allowance and cash from Grandma to each purpose. At Moonjar.com you can buy piggy banks with three compartments for this purpose. This being the digital age, of course, this can all be accomplished online with a virtual piggy bank. Threejars.com plays up the spending, saving, giving theme. At Famzoo.com and Tykoon.com you can tie allowance to chores and a lot more.
Stock Interest in the stock market has been linked to greater financial understanding, and what better way to stoke that interest than making your child a shareholder in a company he or she understands. You can gift a single share, or a certificate, of most large companies like Disney, Apple, Starbucks, Game Stop, Twitter, McDonald’s, Facebook and Netflix—and have something to wrap, and for them to open, through giveashare.com or oneshare.com.
529 plan Saving for college isn’t getting any easier and even a modest contribution to a 529 plan now for a child or grandchild can be worth tens of thousands of dollars when they need it. This is already a popular gift from grandparents, who make up 14% of 529 investors, according to The College Savings Plans Network. A third of those who open an account do so for a beneficiary not yet one year old and the average beneficiary age is age five. So it’s widely understood that starting early is how to get the most out of these tax-deferred education savings plans. Interestingly, 84% of 529 plan investors are college graduates, underscoring their faith in the value of higher education. Search savingforcollege.com or collegesavings.org for a plan that works for you.
Family 401(k) This is my favorite, and not just because I may have been the first to use this catchy term in this way. It’s simply the best teaching tool and affordable head start you can offer your older kids or grandkids—so long as they have a part-time job or worked over the summer and have taxable earned income. The idea is to open a Roth IRA in their name. For those at least 18 years old, it takes about 15 minutes through most any financial institution, and you can do it online. For those not yet 18 it’s a little trickier; I suggest a custodial account at Schwab.
At the end of each year you drop in a deposit matching as much of their income, or their own contributions, as you like up to the IRA limit of $5,500. This is essentially how a real 401(k) plan works; only you are in the role of the employer. A family 401(k) shows working aged children how to save in the real world. It motivates them to earn and save more, and the more you can contribute the bigger head start they will have.
By itself, saving $1,000 a year for just four years from ages 17 through 20 and then letting the money alone to grow (at 8%) to age 70 would turn into $211,000. It becomes more than $1 million if you save the IRA limit of $5,500 those four years. Again, that’s only four years of saving—at an early age. Most people don’t even think about saving until they are well past 30. Those who start saving at age 35 would need to save the current IRA max each and every year for 35 years to get a similar result. A family 401(k) may not look like such a great gift to kids right now. But it would lead to many happy holidays down the road.