Christmas is a time for gifts, especially gifts for children. In considering money gifts for children, here are some pointers in time for this season.
The intent of your gift may just be to allow the child to choose their way of spending the money without any longer term thought to the development of the child’s understanding of personal finances. Depending on the age and understanding of the child, that money gift may be fully consumed in spending or it may be saved and invested at least in part.
The ideas that follow serve for when the intent of the gift is to assist in developing the child’s understanding of money and how it is earned, spent or saved and invested.
Tactics for influencing a child’s development will vary with the age of the child. Until the child reaches around seven years old, little may be achieved due to their lack of appreciation and understanding of the suggestions. Yet making money gifts can be very worthwhile during this stage of the child’s life. This is because, with the accelerator of compound interest operating on any amount saved and invested, and time as a valuable partner, the longer the amount is invested, the more it will balloon into a relatively large sum.
For example, a grandparent can save an absolute amount of $19 200 and with the use of compound interest and the passage of time, be able to generate a gift of $45 000 for a grandchild when that child turns 22. This can be achieved by saving $200 per month from birth until the child reaches eight years old and investing the savings at a compound interest rate of five per cent per year for the 22 years.
After the eight years of saving and investing, no more money needs to be added to the investment. Once left invested, the pool of funds will continue to grow from $22 900 in the eighth year, to $45 000 in the 22nd year and will accrue as a worthy nest egg of $180 000 in the 50th year once left to continue to grow at the five per cent compounded interest rate.
This can be a formidable lesson to a child in appreciating time and compound interest operating together, and also in leaving funds invested. Leaving money invested and not drawing on it is one of the hardest lessons in not spending.
Alternately, if these funds had been used to purchase company stock, the annual rate of return might have been higher and this money gift might have ballooned even more over the years. Here arises the lesson in risks and levels of return.
However, investing in company stock has the added advantage of possibly assisting the child’s development by triggering their interest in understanding stock and shares in due course.
Unlike many other young adults, that child has a reason to study the price movements of that company’s shares and may even extend his interest into the price movements of shares of other companies and his general interest in business and economic news in a focused way. Investment in company stock also offers the opportunity to discuss the role of the investment manager in a mutual fund and the different types of mutual funds available.
Money gifts for children are best when aimed at building their ability to handle money responsibly, contributing meaningfully to their ultimately adjusting well to adulthood. As you consider such money gifts this year, give a thought to following through on promoting the appreciation and understanding of the child to whom the gift is made.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.
