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The Generous Giver’s Dilemma

Even in today’s slumping economy, parents and grandparents can find great financial gifts for kids.

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. 

Mutual Funds

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.

You can find low-cost mutual funds through free online fund screeners, such as those offered by Yahoo! Finance, The Wall Street Journal, and

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 (; 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.

“[Giving savings bonds] will begin to share with them that, ‘Wow, this was given to you by Uncle Joe and it’s now worth $90, when it was worth $50 back when it was given to you,’” says Pablo Bianchi, a financial planner at Financial Advisors of Delaware Valley in Marlton, New Jersey, and a native of Uruguay. “A lot of times we tend to forget you’ve got to initiate this type of approach [about teaching lessons of saving] at a very young age.”

But though savings bonds offer stability, their current interest rates are measly. EE bonds bought through October 2009 have an interest rate of 0.70 percent. Series I bonds bought through October have a current earnings rate of 0.00 percent. (Series I bonds have an inflation component and the rate changes every six months.)

“I’m not a huge proponent," Guerrero says. "There are so many other options that would probably generate a better return versus savings bonds with the same type of safety.”

Highly rated insured municipal bonds are among those alternatives, says the Los Angeles native of Mexican descent. Visit to learn how to buy munis and to find bonds for sale.

529 College Savings Plans

Section 529 of the Internal Revenue Code authorizes tax-advantaged savings plans to pay for college expenses. These 529 plans generally consist of mutual funds and may allow contributions of $50 or less, depending on the plan chosen. Each state has different plans, and out-of-state residents can usually purchase any state’s plan.

Investing in 529s requires making predictions for an unpredictable future. For example, what if a child decides not to go to college? “Assuming you make a 529 the primary source for savings, you’re cornering yourself,” says Bianchi, who has 529 plans for his children as part of a larger portfolio.

The plans do offer some flexibility, though. You may be able to switch into more conservative investments as the child approaches college. And a sibling or other family member can become the beneficiary if the child isn’t college-bound. Also, donors can withdraw the assets for non-educational purposes, although they will pay taxes and a penalty on the earnings. You can compare 529 plans at or

Safety Reigns

For some folks, like Mayrah Rocafort-Mercado of San Antonio, putting money into a savings account is still the best option. In 2007 the Puerto Rico native opened an education fund account for a granddaughter, who is now 13, with an impressive interest rate of around 5 percent. “I really don’t have any trust whatsoever in the economy,” says Rocafort-Mercado, who consults with corporations and advertising agencies that target Hispanics. Having been bruised by the stock market, she doesn't want to risk losing her grandchild’s money there. “It’s a conservative kind of account,” she says, “and if it will help her with the first couple of years [of college], it will be great.”

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