I’m happy to welcome today the Debt Free Guys. Enjoy their guest post on how the gift of investing may be the best present a child could receive this holiday season.
Americans are expected to spend between 4 and 4.5 percent more this coming holiday season than in 2013 or $981 to $986 billion between November and January, excluding auto and gas sales. The lion’s share of that money is expected to be spent on technology, led by Apple’s iPhone 6 and 6+.
Already this month we’ve seen personal finance blogs with advice to manage expenses this holiday season. Expect to see lists of all sorts on financial blogs and websites, such as “25 Gifts Under $25”, “Gifts You Can Make” and “The Art of Re-Gifting”. We’ll kick off our 2014 holiday shopping advice to give the gift of investing this year.
There will be the exceptions, but most American children will have their fair share of gifts beautifully wrapped and lovingly placed under a Christmas tree or next to a menorah. They’ll excitedly un-wrap their gift, play with their new toy or wear the new piece of clothing, but eventually the gift will be forgotten. Some possibly forgotten before the day is over. Others will be forgotten by the end of the holiday season or a few months later. Even iPhones lose their luster after several months.
What won’t be forgotten is education. As we’ve discussed frequently at Debt Free Guys, we believe there is a gap in education in that kids don’t sufficiently learn enough about money management, saving and investing.
Educate the children in your life and give the holiday gift of life-long investing. There are three ways to do this.
Open a UTMA/UGMA Account
UGMA/UTMA account is a custodial account that allows the custodian (one custodian per account) to invest money on behalf of a minor and is a great gift for every child. The custodian must hand over accounts to the beneficiary once they reach the “age of majority” in the minor’s state of residence. Age of majority varies from state to state, but is typically 18 or 21 years old.
Though the money in this account is not accessible to the child until they reach the age of majority, the fun doesn’t have to wait. Add money to this account on the minor’s behalf. Encourage them to add money they receive from other sources as gifts and encourage other family members to contribute.
Have the child help choose stocks, mutual funds or other investments for their account while you teach them to do investment research and make decisions on when to buy and sell their investments. This doesn’t have to be Econ 550. A high-level overview and a fundamental discussion that deepens the older they get is fine.
Have them review the account when you receive account statements or online regularly. Show them how their account performs.
Occasionally, let them revel in their progress. Funds in UTMA/UGMA accounts can be spent on anything, as long as they benefit the minor. Set a financial goal to fund something they want to buy or do. Once they’ve reached their goal, let them make their planned purchase.
This will teach them to invest and the benefits of planning and saving. This will prepare them to maturely manage their money when they’re older. That is a gift that keeps on giving. The added benefit is that you can spend quality time together while teaching them how to invest and possibly spend more time together when they spend their earnings.
Open a 529 Plan
529 Savings Plans are a great gift and a means to fight ever-increasing college expenses. 529 Plans are state-sponsored plans. Maximum account balances range between $230,000 and $310,000. Earnings aren’t federally taxed and are typically not taxed by the state offering the plan. The limitation is that individual contributions can’t exceed $13,000 or gift and inheritance taxes may be incurred.
Similar to UTMA/UGMA accounts, you can encourage other friends and family members, as well as the child to invest money into this account with you. Ideally, this account will be something several family members invest in until the child goes to college. This money will reduce the future student’s college expenses and allow them to graduate with less debt then they otherwise would, or graduate with no debt at all. There are many millennials currently living in their parents basement who would say, in hindsight, they wish they’d received a 529 Plan as a gift when they were younger
As with the UTMA/UGMA account, show them how their money is invested and how their investments perform. Let them do research on the investments and, eventually, let them participate in the decision making of what to buy and sell and when to buy and sell.
Buy Stock
Most publicly traded companies offer physical stock certificates for shares purchased. This is a great gift to give, especially to younger kids. Companies such as Disney, Mattel, Hasbro and Apple are ubiquitous among even the youngest consumers. See this interesting chart of Apple products original price versus how that same money invested in Apple stock would have performed. The value of Apple stock has increased 23 percent since this chart was last updated.
Buy the child in your life shares of stock in the companies that sell their favorite toys and gadgets. For example, if you know a child who knows all the Disney characters, buy them shares in Disney. Call your broker to have certificates delivered to your house. Some brokers may charge exorbitant fees to issue certificates. Google “Gifting Stock Certificates” and you will see a number of third party companies that do this for cheaper.
Gift wrap the certificate and it’s just as exciting as any other gift they’ll receive this year (okay, maybe not entirely), but it can be a great complimentary gift to something else you give. Explain to them what the certificate represents, the benefits of owning stock and teach them how to research its performance on their tablet or smart phone. Not only will this give them a fundamental understanding of investing, but it will give them an investment that could grow significantly by the time their adults. Who knows? You might learn a thing or two, as well. Ultimately, this will lay the ground work for investing throughout their life and that will set them up for financial success.
We get that some of these ideas won’t win the best gift of the year prize. It’s hard to compete with Santa Steve Jobs. Sell the sizzle and not the steak. Regardless of how the gift is received, you’ll start a discussion about investing. Even if this only allows you to have one or two twenty minute conversations a year about investing, it’s more education on investing which ultimately will add value and potentially thousands of dollars to the child’s future.
Editor’s Questions: What do you think the benefits are of teaching kids about investing at an early age? When did you first learn about investing? How might your life have changed if you knew about investing earlier in life?
David Auten and John Schneider are the Debt Free Guys and use their knowledge of over 30 years of experience in financial services and their climb out from under $51,000 worth of credit card debt to help others achieve financial success and independence with their blog and books that can be found at www.DebtFreeGuys.com, Facebook, Twitter & Google+.
Image by Allie Rice at Flickr Creative Commons
Next Post: How to Make a Zero-Based Budget in 3 Easy Steps
Prior Post: Proof It’s the Thought That Counts
I have never thought about opening up a 529 account. That is something to think about.
I myself started learning how to save and to invest when I finally got my first job. This was the time when I had to live on my own and to spend my own money. I am just thankful for that experience that I was able to learn from it. I am proud that I can honestly say that those experiences are priceless!
Have been begging the grandparents for $25 a month in 529 for the granddaughter. Really don’t need another toy or DVD. She is spoiled rotten. Both grandparents finally have money in their lives and love to finally use it on others, but they are spoiling my sweet daughter. That toy isn’t going to be any good when she is 18. Funny I have to convince my parents to do what they had been doing their whole life, but now that they have money they have reverted to “toys.”
We are doing something similar with my son. He is 8 and we have been working on his savings habits for the last two years that he now has extra money for investing. I think it’s never too early to try to teach your kids about investing since it will likely be a part of their lives for a long time.
I think that opening a 529 Plan for my Goddaughter is such a great idea; I’ve been waiting until my student loan debt is lower, but I can’t wait to give to her in that way.
LOVE the idea guys! That number is just a staggering number and in many cases can easily be whittled down to something a little more frugal. Our kids are still a bit young to really get into investing with them, but it’s definitely on the radar for us. We’ve cut what we spend on their stuff at Christmas by half to 2/3 and use the rest for their college savings. That’s something which’ll have much more impact than some plastic toy which will lose its luster in a few days or weeks.