Dear Dr. Don,

Bankrate has been such a great resource to me over the past five years. Its articles are presented in a way that is readily understood by a person who is not educated in the thick language of finance. Now, I have a question about savings vehicles — savings bonds, cash, etc.

Our personal financial situation has turned around from one of extremely high consumer/revolving debt to one with reasonably managed debt levels and living within our means. We’re now at the point where we’ve established an emergency fund and a retirement savings program. (I’m 37 and my husband is 42.)

With all that in place, I have a desire to protect and guarantee some money for some extended family members. There are six children (nieces, nephews and a godchild) on that list.

Rather than buying them gifts today, I’d like to take that money and invest it for their future. I want to make small, routine contributions over the next 10 to 15 years, preferably to one account, with a goal of “paying out” a set amount as each child reaches his or her 18th birthday.

If I die, I want some money disbursed to each of them as beneficiaries according to a designated percentage of what is available at the time of my death. However, if we experience an event of extreme hardship and our emergency funds are exhausted, I wish for these funds to be accessible to us.

I did inquire at my bank about a payable-on-death account, but I cannot specify beneficiary disbursement by percentage. I really do not want to set up six accounts with a $10 monthly deposit to each one … ick! Unless I can learn of some other alternative, I am leaning toward envelopes stuffed into the mattress at this point, but that would not be ideal.

— Kara Cache

Dear Kara,

Congratulations on turning your family finances around. That’s great news. Living within your means frees you up to start thinking about future financial goals, such as providing a nice 18th birthday present for some of your extended family.

I think it’s smart to have this money available to you if you need it over the next few years. Once the oldest child gets his funds, however, the die is cast, and you should stop counting on this money providing a financial backstop.

I like savings bonds for this investment, specifically Series I savings bonds. They’re indexed to inflation, and you can hold them in your name with the children as co-owners or beneficiaries.

The fly in the ointment here is that you have to buy a minimum denomination of $50 — but beyond that you can buy to the penny, so you can invest $60 a month. I’d suggest monthly purchases in a TreasuryDirect account where you rotate the name of the co-owner or beneficiary each month.

If you die, the co-owner, or beneficiary, becomes the sole owner of the bond. The TreasuryDirect Web page “Death of a Savings Bond Owner” explains the details.

Savings bonds do have a minimum holding period of one year, and there is a three-month interest penalty if you redeem the bond within the first five years of issuance. That could limit your ability to tap the funds in the case of a financial emergency.

These bonds would not qualify for the education tax exclusion. You’ll have to decide whether you would pay income tax on the bonds as the interest is earned, or have the tax defer until the savings bonds are redeemed or mature. The TreasuryDirect Web page “Tax Planning” has additional information on taxation. When in doubt, talk to your tax adviser.

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