Who Are Kid's Gifts Really For?

This is a guest post from MLR @ My Life ROI. If you like this post, check out his website or subscribe to his feed.

You know the scenario… you are having a birthday party for your baby girl. She just turned two! She looks adorable in her little sundress and all of your family is there. Cousins, aunts, uncles, grandparents… ALL of them. You have already had dinner, pinned the tail on the donkey, run around the yard, and ate dessert. That birthday cake was great!

And the best part comes after the cake. Everyone loves a cute little kid. And for her birthday some people gave her toys, some people gave her some more cute clothes, and yet others gave checks, gift cards, cash, or bonds.

As the parent you are now placed in an interesting situation. Your daughter is two-years old and does not have the capacity to decide what she would like to do with her gifts, at least the ones with monetary value. She will most likely figure out what to do with the toys and clothes! So you have a few options:

Daddy needs some new jeans

Your daughter is two… what could she use the money for? A hundred dollars for you can help out a lot more than a hundred dollars for a toddler. So what kinds of things could you spend money on?

• Living beyond your means! Go get a new DVD player. Or if you have the player get a stack of DVD’s. Whatever, put it towards that new laptop you have been eyeing! Whatever it is, it is something you need!

• Support a vice! You are addicted to cigarettes. It isn’t your fault and they are getting so expensive. You need a bailout and it’s coming from your baby.

• Fill up your minivan with gas! Did you not drive your daughter to your mom’s house for her birthday party? She owes you gas money then. What’s fair is fair.

• Outback Steakhouse! Seems your daughter decided it would be sweet to treat the family to a dinner at Outback. Pass the bloomin’ onions, please?

• Get some new clothes. Gotta look good for the interview tomorrow. How does a red Trump tie look with this suit, honey?

In all seriousness, this raises an interesting dilemma. Is there anyone here who decides to spend their child’s gift money on themselves or the family? Do you think the rationale that you pay thousands to support your child from birth to adulthood justifies the spending of this money?

If you are one of the people who does this, what do you spend the money on?

Little Miss Pocket looks promising

Or perhaps people gave you the checks, gift cards, or cash because they weren’t sure what your daughter needed. This excites you as it means you get to go shopping for her!

• Take a trip to Kids R’ Us! It’s that time of the year again, it’s a new season! Not only that but boy is she growing quick! Go buy her some new cute clothes.

• Get your fun on with her at Toys R’ Us. She keeps crying over the new Polly Pocket and Barbie Convertible so you might as well use this gift money to get her the toys. Or for the more advanced child perhaps they will enjoy a little Grand Theft Auto. And if not, hey, you might play every now and then.

• Take a trip to Sesame Place! Sesame Place is a Sesame Street themed amusement park. This park in particular is a Pennsylvania park, but I am sure there are similar things elsewhere. This would be an amazing amount of fun for your child! Even more if he or she is allowed to bring a friend!

Whatever way you choose to spend the money this option means you are definitely letting your child reap the benefit of the gift. My assumption is that this is the more popular decision that parents make… but I could be wrong!

However, do you ever think to yourself that your child already has enough material possessions and you don’t want to promote consumerism? I think I would be THAT dad… sorry!

Bank it and let her decide

Well, if you are THAT dad, what option is left? You could take that cash, check, or bond and bank it for your daughter. How should we bank it?

• Savings Account, everyone needs one! I agree and the act of setting up a savings account will bear much more fruit than the labor you put in. If you stick with the lesson you could make sure she always deposits portions of her gifts and allowances so that the idea of saving x% is engrained into her outlook on money. After ten to fifteen years he or she may have a pretty nice sized bank account and the ability to handle their own finances once they leave for college. One word of caution, though. I wouldn’t place too much money in the savings account for your child. The financial aid formula assumes the students themselves will contribute about 35% of their assets towards costs and the parents need to put up 6% of their savings. Savings accounts will count as your child’s asset, thus heavily weighting the formula and increasing the burden on your child. By inflating your child’s assets they will lose money on financial aid. This is very important if you are planning for the future.

• Roth IRA or Coverdell Education Savings Account (formerly Education IRA)! They allow you to invest in mutual funds, stocks, or bonds. Any contributions made are after-tax and grow tax-free. Typically account maintenance fees are minimal and contribution minimums are also minimal. As long as the money is used for elementary, secondary, or higher education expenses the money is not taxed again when it is distributed. That’s right… elementary or secondary! Your child will most definitely need money in their elementary and secondary years. College can be a toss-up so that is a nice feature. CESA’s are more for school purposes and Roth IRA’s for general purpose. Either way, it would be a nice gesture.

• Section 529 Plan! Section 529 plans do NOT count as a student’s assets when it is calculated for financial aid. Come college time your child will appreciate this. If you want to go one step further have your parents (your child’s grandparents) set the account up in their name. By doing this the Section 529 won’t be counted in your assets either when financial aid is being figured out. That means more money for your child when it gets time for college and the dreaded FAFSA. If your child decides to forego college you could always roll the 529 over into another beneficiary so that you do not lose the money.

The three options I chose are obviously very future oriented. And I think that is the right outlook to take for your child. If you have the option of using $50 to get a Tickle Me Elmo or putting that same $50 into a 529 or Coverdell hopefully the latter seems more appealing! You will thank yourself when it comes time to pay the tuition bill.

Would you choose from these three options if you were thinking about putting the money away for your child? If not, what would you choose?

Conclusion

There is obviously no definitive answer to my original question… Who are kid’s gifts for? But in choosing what to do with the money, the chosen option should ideally be beneficial to both you and the child. It should not be a huge burden to you that you are putting money away. After all, you weren’t budgeting for these gifts, were you? What you choose to do with your child’s money can have a large impact, though, so don’t take it too lightly!

In the end I think this is a very personal decision and I am sure everyone approaches it a little bit differently. I would like to hear some of your input, readers.

Comments

[SmartSecurityPeople.com]

Our kids are very young... under 3. We have taken all the birthday and Christmas money and opened up minor savings accounts for each of them. Our assumption is that we will keep it there for a while until it builds up some steam. Then we may roll it into a CD or something with a little better return. My guess is that these funds will be depleted on purchases long before they head to college so we won't have to worry about it impacting their FAFSA figures.

Our other plan with the money was to buy them diapers because that is really what they need right now (and what our budget doesn't need). However, our conscience overtook the diaper route and that is why we have the savings accounts in place.

Good post!

[cmadler]

While it sounds good in theory, a Roth IRA is probably not an option because your two-year-old doesn't have any earned income.

[Strick]

Here's the rule I ended up following - for the first $20, take them to the store and say that 'X&Y' wants to buy them something, that even a 2 year old gets and is most likely to satisfy the givers' wishes. Any amount over that put in their own savings account. I do not like the accumulation of stuff, but we are really only talking twice a year at most (XMAS and B-day), so $20 doesn't exactly create clutter.

My 6 year old has now taken control over his savings account and it is a wonderful teaching tool (don't leave any change lying around my house).

[My Life ROI]

@ SmartSecurity --
That is a good idea. What do you figure the money will be spent on since you don't think it will be around come college time? First car? Prom? Stuff like that? And yeah, diapers are brutal. That and formula! Glad you liked the post :)

@ cmadler --
The usage of the "two-year old" in the beginning is to paint a picture. The advice throughout is for a child of any age. Once your child starts earning money (other than allowance) you can open up a Roth IRA. This earned income can be from delivering newspapers, babysitting, shoveling snow, cutting grass, raking leaves, etc. I started earning money when I was 8 by doing work for my neighbors. Perhaps your kids may not start that young, but nonetheless the option to open a Roth IRA does exist for children before they reach the age of maturity. Thank you for pointing that out since I didn't break that down!

@ Strick --
That is a great idea, too. I have a recent post on my blog about how my gf's parents used to make her put 10% in a charity "account" and 10% in a savings "account" before she could spend any of it. She, too, was in control of her own spending at a young age. I was raised very similar. You will, most likely, have a very responsible (financially at least) son!

[Bad_Brad]

This may be a bit off topic, but I have always thought it was really stupid that 529 assets are not included the kid's assets but Coverdell ESA assets are when it comes to completing the FAFSA.

[SUSAN FROM LI]

We always put our son's birthday, Christmas and other (school awards, etc) money into a savings account. When that grew a bit, we opened a few CDs. He has used some of the money to buy things he could otherwise not afford (new musical instruments).

Right now he's probably got enough for a cheap used car in a couple of years and a year's worth of car insurance (or a real good sized emergency fund to start college with).

Boy do I wish I had started off my adult life with an understanding of an emergency fund.

[Param]

Very nice article, I can connect because my son just turned 3. However, I lost respect for the author when he mentioned Roth IRA. I thought they can be funded only by "earned" income (which must be supported by W-2 or something) - I bet gifts don't count.
My thoughts
a. Buying for self/family means you are not fit to be a fiduciary for your child's assets.
b. Buying for the kid - if it was something you were planning to buy anyway, you must have funds allocated for that irrespective of the gift. I would recommend this only if the kid is old enough to make a decision of what to buy with their gift money or the person giving the gift recommends you buy something on their behalf (someone being too old or unable to find time).
c. Investing in bank account - acceptable till you work out a plan to invest for long-term. Leaving money in checking or savings account that loses to inflation in the long run will again indicate you are not fit to be a fiduciary for your child's assets. Education IRAs seem to be the most acceptable solution. Though, if they are already well-funded by yourself, I would recommend putting it into a index fund by Vanguard for the really long-haul. In any case, please don't put it in a piggy bank - I think that's the worst option!!!

[Nicki at Domestic Cents]

Timely post for me. My daughter's 3rd b-day is in a couple weeks. The above scenario plays out almost exactly for us - TONS of family members come to her party. She doesn't receive large amounts of money but she does get small amounts pretty frequently.

We've never taken her to the store to spend it. We always have her put it in her piggy bank. When the piggy gets full he goes to the bank (her savings account). We've never spent it on ourselves. I think $5 sitting in a savings account for the next 15 years will make a much bigger difference in her life than a new Barbie right now.

[Andrea]

Taken from savingforcollege.com "Grandparent assets, including grandparent-owned 529 plans, are not reportable on the Free Application for Federal Student Aid, or FAFSA. If you or your child were to own the 529 account, as much as 5.64 percent of its value would be included in the "expected family contribution," or EFC. Clearly, there is an advantage to a grandparent 529 account when it comes to asset value."

http://www.savingforcollege.com/bankrate_articles/article.php?article_id=80

I'm interested in this question because we're almost at the point of deciding whether to fund our own Roth IRAs and take distributions later to help pay for our daughters' college or to fund 529 plans.

[My Life ROI]

@ Param -- Sorry you lost respect for me... please see my reply to another commenter, though.

"Once your child starts earning money (other than allowance) you can open up a Roth IRA. This earned income can be from delivering newspapers, babysitting, shoveling snow, cutting grass, raking leaves, etc. I started earning money when I was 8 by doing work for my neighbors. Perhaps your kids may not start that young, but nonetheless the option to open a Roth IRA does exist for children before they reach the age of maturity. Thank you for pointing that out since I didn't break that down!"

Roth IRA's are viable options once your child starts working... even a little bit.

[Anitra]

This is exactly our plan. We can't save much for our daughter's future (although we do set a little aside), but we can certainly make sure that any monetary gifts go into her savings (and later, into an ESA or 529). We started this with the money we were given when she was born (her "first" birthday). As she gets older, we'll probably let her spend a LITTLE of the money she gets, but most of it will continue to go into savings.

[My Life ROI]

@ Brad --
Agreed... oh the complicated structures we set up.

@ Susan --
Letting him use some of the money for musical instruments is great :) I love the arts! And I definitely agree on having them put at least a decent amount towards the car or insurance to instill the idea that their is a cost associated with driving. You are teaching some great lessons!

@ Nicki --
I think your last sentence captures the point of this post perfectly: " I think $5 sitting in a savings account for the next 15 years will make a much bigger difference in her life than a new Barbie right now." Great comment :)

@ Andrea --
Run the numbers and see what makes more sense. If you wanted to email me your actual situation I can give you some more feedback. My contact info is on my site.

@ Anitra --
I think the fact that you will let her spend some of it is key. The child needs to realize getting money needs to be looked at as both fun and future oriented. A little fun now, but a lot of planning for later. If they don't spend any they may push back and spend frivolously during their young adult years (kind of like when you put a bunch of college freshmen in front of a keg...).

[Param]

Sorry - will take back my remarks on losing respect. Perhaps I should have gone thru the other comments & responses instead of the article alone...
Wouldn't it be easier if the clarification can be added in the original article itself???
Regards, Param

[Shelly]

Any cash gifts go towards educational activities like tumbling class. Then I can give exciting reports back about how she's doing in the classes.

This holds with my philosophy of experiences rather than things. Though certainly my child has ample toys given how many people give her gifts (even when I ask them not to) and I fill in with garage sales/visits to the educational toy stores.

We already have a college fund for our 3-year-old courtesy of one set of grandparents, and we're started a savings account, too. So no guilt there.

[Bethany]

My boyfriend and i have been talking money and completely dissagree on the gift of money. My children are 6 and 9. I haven't set them up with savings yet but I am figuring out allowances and with that i will set up a savings account for each of them. Now that my children have an opinion of things they know what they want. My grandpa gives them a one time gift of 35 dollars on their birthday. Here's my dilema. I believe that is theirs it was their gift and they should be able to do with it as they please (not to mention of course its their favorite gift because they can pick out their own stuff) My other half believes that money should be put in a savings account. I agree with children saving money thats where the allowance comes in. I say why not take their clothes and toys back and put the cash in savings as well? It was a gift too..isn't that the same thing? Kids getting money any other way I completely agree with savings but its a gift and to them? I just can't see taking a gift away from a child? HELP!!

[FMF]

Bethany --

I'll post your question in a week or so and have my readers take a shot at it. Stay tuned.

[Kevin]

Bethany,
I have a 4yr old and this is what we have done since his 3rd birthday/X-mas. While opening gifts, we pull aside the ones with gift receipts. When he is done, we let him decide what he wants to return. With the "store credit", we let him buy whatever he can afford. He loves store credit and beams when he hands over the gift card and says he is paying. As far as cash, we put a couple bucks worth of change into his piggy bank and bank the rest. Through out the process, we document the returns and who gave the gifts. After the purchase, we can tell him so-and-so gave you the money to buy that toy. So when so-and-so asks how he liked the gift, he always tells them he plays with their stuff all the time. The bonus is he plays with everything and sometimes he has enough store credit for the next trip.