While fads come and go, you can count on money as the perfect holiday gift for a child. True, it might not be as exciting as a new video game or a pet cat. But with a little creativity, a financial asset can be turned into a great gift - and a learning experience as well.
There are more options than ever, from old- fashioned savings bonds to college funds, life insurance policies, and even individual retirement accounts (IRAs).
"Kids outgrow clothes and toys, and fashions go out of style very quickly. But the financial gifts are the ones that keep on giving," says Greg McBride, senior financial analyst at Bankrate.com.
To navigate the bewildering array of choices, experts recommend that adults carefully consider their goals for giving. Do you want to educate your loved ones about investing? Give them financial security down the line? Or just prevent your offspring from blowing all their Christmas cash on an Xbox?
If you're looking to give a fairly small gift, like $50, think about savings bonds or certificates of deposit, says Mr. McBride. "[CDs] are more appropriate for a shorter investment horizon. The rates of return are very low because there's no risk," McBride says. "If this is a gift that you expect will be used for a fairly short period of time, within the next two or three years, that's a suitable alternative."
Savings bonds might be a better option if you're looking at a longer term, but their rates aren't very high either. Federal EE bonds are a better deal right now than inflation-protected I-bonds, McBride says.
Individual stocks and mutual funds are a somewhat dicier prospect. Brokerages typically charge the same transaction fee - often $20 or more - regardless of whether you're buying $100 worth of a stock or $10,000. An online brokerage might charge as little as $8, "but if you're giving $50, that's 16 percent, several years of potential gains," says Bill Mann, senior editor for investing at The Motley Fool, a financial advice company.
To get around the problems of hefty expenses, some brokerages offer mutual funds with no transaction fees and may be willing to bend their rules about how little you can invest, Mr. Mann says. "What you can do is call them up and say this is a gift for a child, we'll put in X amount over a period of time. Most of them will waive the minimum."
Two other handy ways to give stocks or funds to a child are through a college 529 fund or an IRA.
Some financial advisers are big fans of 529 funds, which sock away money and defer taxes until college. One benefit is that the donor owns the funds, which means they don't count as part of the child's assets and won't reduce his or her eligibility for financial aid, says Tom Warschauer, professor of finance at San Diego State University.
The investment managers and fees differ from state to state, so potential investors should check the 529 plans of several states as well as their own, recommends Joseph Hurley, chief executive officer of Savingforcollege.com. Plan contributions can be invested in a variety of funds, he says, and one of the most popular options is an "age-based" fund that shifts money from stocks to fixed-income investments as a child gets closer to college.
But what if the beneficiary never goes to college? According to Mr. Hurley, the funds can be transferred to another family member or withdrawn with some penalties.
If a teenager has a full- or part-time job, another great alternative is to open a Roth IRA, McBride says. "A $3,000 contribution for a 15-year-old would grow to more than $140,000 by age 65 at an average return of 8 percent," he says. While Roth contributions aren't deductible, teens won't have to pay taxes on distributions later in life, when their tax rates will presumably be much higher than they are now.
If you decide to give stock or mutual funds to a teenager, even in a 529 fund or an IRA, consider his or her interests. Fans of rap music might be intrigued by an investment in a record company, while socially conscious mutual funds may thrill a budding environmentalist. And while you're at it, spend some time educating your loved one about finances.
"The biggest hole in our educational system is the lack of financial literacy," says Professor Warschauer, who gave stock in a video-game company to his teenage son 10 years ago. His son later sold the stock and is now studying to be a video-game designer.
Another investment gift option: life-insurance policies. In some cases, donors will set up an account for a child that will grow in value and pay monthly premiums for decades. But Warschauer doesn't recommend life insurance for kids because it is designed to protect the assets of an adult with responsibilities. With children, "you're paying for something you don't need," he says.
Regardless of what financial gift you choose, make sure to check out potential tax ramifications. Those who give more than $11,000 generally face gift taxes. Delayed financial gifts - such as those that children can't get their hands on until they're 25 - may smack kids with a hefty tax bill down the road.
Even if you carefully study the tax rules and shell out money for the most appropriate financial gift, there's no guarantee that a child will understand its value as compared to, say, a Barbie set or a puppy. Especially with younger children, you may wish to throw in a stocking stuffer to smooth over any disappointment and keep from getting tagged as boring.
Then again, a "delayed gratification" is nothing to sneeze at, Mr. Mann says. "You'd have a hard time convincing me that kids these days are undergratified."