For Martin and Milvia Pinzon of Brooklyn, New York, giving their grandchildren financial gifts hasn’t been about transferring mere dollars and cents.
“It’s important to pass on the values and traditions of being financially responsible and to make sure [kids] understand that education is important, and it’s something they should plan for and finance early on,” says Martin Pinzon, 74, who works in corporate office space maintenance and has a wood refinishing business. Originally from Colombia, the couple has contributed to the savings accounts of both their grandkids, bought them certificates of deposit that earn interest for a fixed term, and invested in mutual funds on their behalf. They tell their children they hope their gifts will help finance the grandkids’ education and, later, help them buy a home.
Sure, cash might garner more enthusiastic hugs from young ones, but some of the best financial gifts are those with the potential to teach and to grow with children. Parents and grandparents can choose from a number of advantageous options:
The S&P 500 Index dropped 37 percent in 2008 from the previous year and continues to wobble, so stocks may not, understandably, top a gift list. Still, don’t toss stocks out of contention wholesale.
“Right now is a very fearful time for many people,” says John L. Diaz, president and chief executive officer of Premier Financial Advisors in New York and a native of Chile. “But I still would always argue that you want to have investments that outpace inflation over time, and, historically, stocks...have outpaced inflation.” That’s particularly important because college tuition usually outpaces inflation, too.
Over the long term, stocks have outperformed other investments, including many kinds of bonds. “Right now is an excellent time to be buying stocks for a minor,” says Alex M. Negron, senior financial advisor at Holland Financial in Lake Mary, Florida, who was born in Puerto Rico. “You’re buying at a low point and you’re letting those stocks appreciate, so the gift has greater potential for it to be larger.”
Think about purchasing stock in companies kids recognize. “If the child is aware of the fact that they own stock, it might get them on the road to learning about how the market works and appreciating investing,” says Laura Guerrero, a financial advisor at Edward Jones in Whittier, California.
Companies with direct stock purchase plans allow you to purchase shares directly and generally with reduced fees. Even better: if possible, transfer shares you already own that have appreciated. The strategy allows you to avoid being taxed on the capital gains, and if the stocks are sold, the child will generally be in a lower tax bracket.
One way to potentially reduce the risks of buying an individual stock is to purchase stock mutual funds, which invest in many stocks and are professionally managed. Yes, you’ll still face overall market volatility—how’s the Dow doing today?—but by broadly investing in so many companies, the fund’s performance isn’t dependent on how a single stock performs. There are also funds that invest in bonds, money-market instruments, and other securities, too.
Be aware that a fund’s fees and expenses can eat away at gains. The Fund Analyzer online tool of the Financial Industry Regulatory Authority can help you compare the fees and expenses of different funds.
Savings and Municipal Bonds
Series I Savings Bonds and Series EE Savings Bonds are easy to buy in a bank, through payroll deductions, or online (www.treasurydirect.gov); are safe investments because they are backed by the government and designed to never lose value; and can be a great learning tool, especially if you opt for paper bonds—which children can actually hold in their hands—over electronic ones.