Fiscally fabulous giving
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Looking for a holiday gift idea for those youngsters in your life?
This year, give the gift that keeps on giving: a new financial tool.
Since most of us focus on spending rather than saving or investing during the holiday season, you won’t find most of these gift ideas in a toy catalog.
Instead, as a shopping aid, we’ve enlisted the guidance of three financial education experts for suggestions on 12 days of monetary magic for the kids in your life: Laura Levine, president and CEO of Jump$tart Coalition for Personal Financial Literacy, based in Washington, D.C.; Leslie Linfield, executive director emeritus and founder of the Institute for Financial Literacy, based in South Portland, Maine; and Patricia Seaman, senior director of marketing and communications for the National Endowment for Financial Education, based in Denver.
Read on to see their picks for the holidays. Five golden rings not included.
The classic piggy bank
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On the first day of Christmas, my true love gave to me … a simple place to store my money.
For many of us, our earliest memories of money start with our cherished childhood piggy bank, a repository of far more than mere loose change.
“It is the greatest tool out there because it’s tactile; kids understand the idea of taking a coin and putting it in,” says Linfield. “The idea is as old as time, and it’s a great teaching tool. It’s the beginning step of understanding that you’re putting money away toward a goal.”
What makes piggy banks so timeless?
“Studies show that with (children and) money, you have to give them an action immediately, not six months from now,” says Levine. “If a child gets money, you don’t want to say to them, ‘Next week we’ll do something with this.’ You want them to do something with it right now that’s fun and sticks in their mind.”
When shopping for a piggy bank, our experts say to choose a transparent type, ideally one the child can build and customize.
“That’s a great visual tool for a very young child because it shows them that the money literally gets closer and closer to the top of the pig,” says Seaman.
Savings account
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On the second day of Christmas, my true love gave to me … a savings account to begin learning about the banking system.
Helping a child open his or her first savings account is one of life’s financial milestones.
“Take that extra 15 minutes, drive to the bank, walk your child inside, stand in the little S line. This is the next step for your child,” says Levine. “Don’t just take your child’s money and deposit it for them because then they don’t connect to it. Let them have the whole experience.”
Seaman agrees: “It engages all the senses basically. The more senses involved in a financial activity, the more it will stick. People at the bank are very nice; there are usually lollipops involved. There’s nothing but positive associations for the child.”
Linfield started her three children saving early.
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“At the age of five, children can really begin to understand the concept of money and money management,” she says. “You want either a passbook account or one with paper statements because kids are tactile. Every month, their statements come and we go through the ritual of opening it up and reviewing it, spotting their deposits and earned interest. It may not be a lot right now, but it’s important for them to see that.”
Prepaid card
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On the third day of Christmas, my true love gave to me … a prepaid card that can be used anywhere, without affecting credit.
In that social netherworld of tweens and early teens where peer pressure to carry plastic can become overwhelming, a prepaid card can serve as a handy relief valve.
“The prepaid card is completely unforgiving; when there is no more money on the card, your child has to stop using it,” says Seaman. “If your child doesn’t respond to self-direction, if they don’t respond to gentle guidance, if they need hard-and-fast boundaries, then the prepaid card is the way to go.”
Levine agrees: “Rather than giving your child a weekly or monthly allowance, you could say, ‘Here (is) X amount of dollars, and you need to figure out how to make it last,'” she says.
“But it is a mistake to think that a prepaid card helps prepare students for credit cards. It doesn’t,” she says. “It doesn’t involve payments or interest or a credit score. It’s not a credit card on training wheels. The similarities between a prepaid card and a credit card are on the spending end, not on the paying-back end. And the spending end is where our kids need the least amount of help.”
Checking account
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On the fourth day of Christmas, my true love gave to me … a checking account to start learning about deposits.
Holiday checks are often one of the first incentives for a young person to have his or her own checking account.
“Their first interaction with checks will be as presents or as payment for something like baby-sitting or dog walking,” says Linfield. “They now understand that these are alternatives to paper currency, and the only way to turn that into paper currency is to go to the bank and either deposit it or cash it.”
Seaman says today’s teens may be the last generation to actually use paper checks. “Debit cards are becoming the preferred way for younger people to handle expenses,” she says. “Now, checkbooks are only needed for paying things like the rent; everything else is done online.”
Gone, too, is the parental tutorial on how to reconcile a check register. “I haven’t balanced my checkbook in years because I’m dealing with things online,” says Seaman.
That doesn’t mean teens don’t still require some instruction.
“Parents have an opportunity to guide children on how quickly fund debits will show up in their account and how to create an overdraft buffer so they don’t trigger an overdraft,” Seaman says.
Credit card
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On the fifth day of Christmas, my true love gave to me … a piece of plastic.
The first credit card in one’s own name has become a rite of passage in America. But what if your kid can’t get a credit card on his or her own? Is the young adult on your list ready? Or would they benefit instead from an account connected to their parents?
“It so depends on the temperament and ability of the child, and parents know their children best,” says Seaman. “If what you know about your child is that they get all of the limitations and financial knowledge that you’ve been conveying, then it probably is less important to have an account that links directly to yours or one on which you have some oversight. Go ahead and set your kids free, and let them learn to manage this on their own because they’ve demonstrated some responsibility in the past.”
Parents have two ways to give the gift of plastic: They can co-sign for a card for their child, making them equally responsible for the charges on the account, or they can add their child as an authorized user under their own credit card account, allowing their youngster access to their preset limits.
But if you’re less sure they’re ready for plastic, tread carefully.
“You don’t want to set up your child for credit score failure by giving them a card that they can’t manage effectively too early, because you don’t want to start them off with a record of not paying the bills or missing payments. You want to assess their capability before you make a decision,” Seaman says.
Automatic transfer
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On the sixth day of Christmas, my true love gave to me … the ability of automatic transfer.
Once a young person masters the mechanics of checking and savings account management, it’s time to introduce him or her to the gift of automatic transfer, which allows an account holder to move money online from checking into savings, a money market account, CDs and individual retirement accounts on a regular basis.
“The reason that’s important is, you get into the habit of paying yourself first and setting goals, whether long-term or short-term,” says Seaman. “It doesn’t all have to be about retirement savings. It can be transfers to another savings account for short-term goals like buying a car or a down payment on a condo or a vacation. It’s a great habit to get into that will serve throughout their life.”
Even though today’s young adults grew up online, making the mechanics of online banking largely instinctual, Seaman says they still need guidance on how and why to save.
“You want to accompany each milestone with some guidance from the parents on managing expenses, maybe how to set up a budget, how to anticipate what they’ll need the money for, and help guide them toward good, responsible management of their funds,” she says.
Stocks
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On the seventh day of Christmas, my true love gave to me … stocks in my stocking.
Start teaching your loved ones early why so many people love the stock market. Investing small amounts in companies they know is a good way to demonstrate the ups and downs of how the market works.
“Have them meet with your financial planner, and begin purchasing stocks,” Seaman says. “And for Christmas, ‘stocking stocks,’ where they actually have one in their stocking. You can still purchase stock certificates, or it can just go into an account if you don’t want to pay the fee for the actual certificate.”
Linfield says 2 of her 3 children have Uniform Gift to Minors or Uniform Transfer to Minors accounts, known as UGMAs or UTMAs, the child version of brokerage accounts, and have a ball investing in their favorite products on a shoestring budget.
“There are just certain stocks that kids will relate to: Hasbro, Walt Disney, McDonald’s. Companies that they are familiar with and they’re solid companies,” Linfield says. “When you’re whipping through the McDonald’s once a month and you’re munching on the fries, it’s, ‘Hey, I own that company. I’m not just paying money to buy the fries; they’re paying me a dividend!'”
IRAs, CDs and savings bonds
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On the eighth day of Christmas, my true love gave to me … an early start on the road to retirement.
Saving for retirement should begin “as soon as a child has earned income,” says Seaman. “It’s another way to enforce savings.”
Linfield agrees. Her three teens are all working, and each already has an IRA.
“I don’t think that’s a bad gift,” she says. “We want to teach them to plan for retirement early.”
Seaman suggests starting with U.S. savings bonds, CDs and an IRA.
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“This really brings home the idea of delayed gratification, the idea that you cannot have everything that you want today,” she says. “Tools like this can really help people in their budgeting and planning for the future. They generate a little bit of income, but they make you wait for it. It’s never a bad idea to wait to spend your money. It gives you more time to contemplate what you’re going to do with it.”
But Levine questions the wisdom of starting so young.
“For those older teens who have income, it certainly is not a bad thing, but I don’t think there’s a need to rush our teens and preteens into thinking about retirement savings,” she says.
529 plan
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On the ninth day of Christmas, my true love gave to me … a 529 investment plan for college.
Given the rapidly rising costs of a college education, getting started on saving for it with a tax-advantaged 529 plan is a smart way to start the new year.
“There are some limitations on them, but given that the baby boom generation was probably the least prepared to send their kids to college, anything that the next generation can do to send their kids to college, I say go for it. Because we really have undersaved; we have underprepared for the future,” says Levine.
Enthusiasm for 529 plans waned a bit when investments took a dive during the recession. But Seaman says volatility simply requires closer management.
“Many 529 plans definitely have fixed-income choices ranging from a savings account to money market to CDs. All of those are 100 percent insured, and that’s what people should be thinking about anyway as their child gets closer to college age,” Levine says. “You need to be moving money out of stocks or mutual funds and into more stable investments because you don’t want to experience a big drop in your 529 the year that you need to pay tuition.”
Emergency fund
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On the 10th day of Christmas, my true love gave to me … an emergency fund.
This gift is terrific for those on your list in their 20s or older.
Helping a loved one “seed” an emergency fund in the savings vehicle of his or her choice doesn’t mean the money is likely to sit there for long.
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“Frankly, most of the unknowns covered by emergency savings are really known to us. We may not know when they happen, but we know that they will happen,” says Seaman.
Case in point: holiday spending.
“It doesn’t surprise us; we know every December we’re going to be giving gifts,” she says. “We can prepare for that. Or, if you have a car, you know you’ll probably take it to the shop for something. Other things such as your health care deductible, you don’t know when they might come up, but you can be certain that they will at some point.”
Having an emergency fund of 3 to 6 months’ worth of income stashed away acts as a hedge against a potentially larger financial blow.
“A big reason for an emergency fund is you don’t want to have to put it on a credit card and have to pay 18 (percent), or 22 (percent) or 26 percent on an emergency,” Seaman says. “It’s much better to have it in cash.”
Charitable giving
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On the 11th day of Christmas, my true love gave to me … the significance of charitable giving.
Teaching those in your life how important it is to give back is a gift for those in need, as well as a gift for the giver’s heart.
What would the holidays be without sharing with those less fortunate?
“Charitable giving is included in the financial standards that Jump$tart produces,” says Levine. “It’s not an add-on; this is an important lesson and part of money management — not just money for the sake of personal wealth but also how you use it. It also helps you value money.”
Levine says that while children are naturally generous, as they grow, their own good fortune may insulate them from the needs of others.
“Thinking charitably is a way to help kids appreciate the value of money if they’ve never had to worry about money,” says Levine. “It’s a good lesson, and we’re seeing it increasingly in different financial education programs.”
She suggests this helpful holiday tip to instill the gift of charity in children.
“Parents who are going to give gifts of money this Christmas should consider breaking your gifts into several parts. For instance, if you’re going to give someone $15, give three $5 bills. This helps facilitate the idea that you want your child to be able to spend some, donate some and then save some for later,” she says.
Have a little fun!
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On the 12th day of Christmas, my true love gave to me … lots of holiday fun!
“It’s the (holidays),” says Levine. “Smart spending means not overspending and making good choices; it doesn’t mean not buying Christmas presents.”
Even so, Levine says all saving and no spending sends the wrong signal to young people.
“I think that if the family circumstances permit it, kids can and should have slightly more frivolous use of their money. I think it is more effective to let kids save for something that is meaningful to them — a bike, a motorcycle, a prom dress — and let them have that meaningful moment when they accomplish their goal,” she says.
“Let this be a happy thing, and they will go into adulthood saying, ‘I get it. I know how this is supposed to work.’ If your kids start too young and they’re only saving for things far in the future that are weighty and serious, they might come to think of saving as just a black hole. In terms of getting kids excited about saving for later, I’m kind of in favor of early, fun successes.”
