Investment Gift for Child: Nurturing Financial Literacy and Future Success | INVESTEDMOM
Did you know only 29.7% of teachers reported teaching any sort of financial literacy to their students? In addition, in 2021, 75% of teens reported learning about personal finance from their parents. These statistics mean potentially a quarter of kids receive zero information on managing their finances before being thrown into the real world.
Parents must start teaching their children about managing their money responsibly from a young age, and an excellent tool to achieve this is through investment gifts.
This article will discuss how financial gifts will set up your child's future for success, explain the best financial gifts, and discuss factors to consider to ensure your investment will work best for you and your child.
The Power of Investment Gifts
You may wonder what an investment gift is and how it can help financial literacy. Financial gifts for kids are a present given to your child, which is an asset or financial instrument that, if properly managed, will grow in value over time.
Unlike a traditional or cash gift, investments cannot be consumed or used up and instead offer long-term financial benefits to your child. Though they may not be initially as thrilled about the gift, it gives you as a parent the opportunity to teach your child the value of financial responsibility and discipline. A great way to explain your choice of gift would be to have a conversation about becoming financially mindful early.
The earlier you start investment accounts, the more time they have to grow and compound interest resulting in wealth accumulation and financial independence. The money will help your child have more flexibility and opportunities to reduce stress when it comes time to make significant decisions such as student loans, weddings, housing, etc.
Start with a clear investment strategy that aligns financial goals and risk tolerance, and allow your child to be part of the process. Seeing the benefits of long-term investment accounts will help teach young kids the value of saving money rather than spending it right away.
Types of Investment Gifts
When it comes to investment options for your children, some are better than others. I've outlined my top three favorite ways to gift money that will help secure your child's financial future.
Stocks and Bonds
While stocks and bonds are both a form of investment through their purchase, they are different in how they operate.
When you purchase gift stocks under your child's name, they become a shareholder for a company or organization and have the potential to benefit from their profits. The value of stocks fluctuates based on the company's performance, stock market conditions, and investor sentiment.
There is definitely a risk of loss when investing in the stock market, especially in the short term. If you want to gift stock, ensure you diversify and give plenty of time for that investment to grow.
On the other hand, savings bonds are issued and purchased through the government or corporations and involve essentially giving money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity.
Because the maturity date is selected, they are an excellent option if you have a specific time frame in mind. Savings bonds are much less volatile, though the market prices of bonds change, so the yield will vary.
Both stocks and savings bonds play an essential role in investment portfolios. Diversifying across different asset classes will help mitigate risk and help create a sound investment strategy for your child.
Mutual Funds and ETFs
Mutual funds and exchange-traded funds (EFTs) are similar to stocks and bonds, but there are some key differences.
We'll start with a mutual fund, a pooled investment that collects funds from multiple investors and is then used to purchase a diversified portfolio of stocks, bonds, and other securities.
Mutual funds are a great option because they offer a diversified portfolio that the fund manager manages, so it's a little more hands-off than trying to figure it out yourself. Some things to consider are many mutual funds require a minimum investment and some charge fees for maintaining the funds.
When your child eventually wants to use their funds, they can be bought and sold at the end of the trading day at whatever value they hold at that point in time.
What about EFTs? They are similar in that they are a type of investment fund traded in the stock market, and they offer diversification by investing in various assets.
The difference is you can purchase and manage EFTs yourself, which results in lower fees, and they offer more trading flexibility as the market fluctuates throughout the day.
When deciding between the two, ask yourself how hands-on you would like to be and if you are willing to pay extra fees to manage funds.
Savings Accounts and CDs
Everyone knows what a savings account is, right? But did you know that different savings accounts offer varied benefits and accessibility?
Banks and credit unions offer a traditional savings account. They allow you to store money while earning interest on the balance. A savings account offers high liquidity, which means you can take out the fund whenever or however you want. These accounts are insured up to a specific limit, usually $250k per depositor, and many offer no fees with a minimum balance.
A savings account is an excellent choice for emergency funds, short-term savings goals, and funds you need access to in the near future.
On the other hand, a CD or certificate of deposit requires a fixed amount of money that must stay in the bank for a specific period. CDs are less flexible on the amount of capital and its liquidity, but they offer higher interest rates and are insured like a regular savings account.
The type of savings account you choose will depend on your family's needs, but they are an excellent option that offers little to no risk while slowly growing the funds through interest payments.
Factors to Consider When Choosing an Investment Gift
Now that we’ve discussed the different options for an investment gift, how do you begin to decide what type of financial gift is best for your child's future? There are three main elements to consider to ensure you choose to suit your needs best.
Risk Tolerance
Understanding risk tolerance is essential before you purchase a financial gift. It refers to your willingness and ability to withstand fluctuations in the value of the investment. To assess risk tolerance, consider the following elements:
Consider your child's age and time horizon: A young person will have a longer investment horizon, allowing time to recover from short-term market fluctuations.
Discuss financial goals: Is your child saving for educational expenses, a car, or something else? Short-term goals will require a more conservative investment with lower risk vs. a long-term plan with increased risk and the potential for higher returns.
Determine risk capacity: Assess your child's risk capacity. Suppose they are younger and the investment won't affect their current financial well-being. In that case, their risk capacity is high, vs. a low capacity for someone relying on their investment to meet financial needs.
Also, consider things such as their emotional comfort as they watch market fluctuations and whether or not they seek to have a diversified portfolio to help mitigate risk. If you hire a financial adviser, they can help assess your risk and give guidance based on your child's needs and goals.
Time Horizon
Your time horizon consists of the time from when the gift is given to when your child will use the funds. If your child is younger, choosing stocks, savings bonds, mutual funds, and EFTs is beneficial as they will have time to grow and accumulate funds.
On the flip side, it's wise to choose a less risky option for older kids or in cases where the money needs to be more liquid, such as savings accounts or CDs.
Cost and Accessibility
When researching what financial gift you want to give to your child, it is essential to determine the costs of various options.
Savings accounts and CDs are typically no-stress options that do not require fees, though some CDs require a minimum amount.
Stock market and savings bond purchases don't require minimums, though many benefits from a financial advisor guiding their efforts to ensure the best return,
Finally, mutual funds and EFTs may require different minimums and fees, so do your research to ensure they meet your needs.
Setting Up and Monitoring the Investment
To set up custodial accounts for investments, you must designate a responsible adult (you or whoever will manage the investment until it reaches the age of maturity and the child takes over). To do this, follow these steps:
Select the Account Type (the type of financial gift you plan to give)
Select the Financial Institution (make sure it's reputable)
Designate the Custodian
Provide Documentation
Fund the Account
Once your investment is in place, it's time for continual monitoring. To do this, ensure you do the following:
Stay informed on market trends and economic developments that can impact your investment
Review the investment portfolio regularly to ensure it remains aligned with your goals
Educate your child and involve them in decisions regarding their financial gifts
When the time comes, prepare your child to ensure a smooth ownership transition.
Nurturing Financial Literacy Alongside Investment Gifts
Giving financial gifts is simply not enough to prepare a young person for a future of financial literacy. Involve them throughout the process so they understand their investment type, how to manage it, and how it can be used in the future.
Am I telling you to teach your 5-year-old about the many stock options in their mutual fund? Absolutely not! Starting small is essential to ensure they are not overwhelmed. Start by teaching the value of money and giving them a piggy bank, emphasizing saving, and introducing them to the idea of investing.
In their teenage years, encouraging them to earn their own money, explaining credit, and talking to them about budgeting are grand entryways before you discuss investments.
Use Financial Gifts to Set Up Your Child for Success!
An investment gift for your kid is much more than giving your kids money for the future. Paired with early financial education, it will set up your child's future and help them become more independent before leaving home.
Ensure you select financial gifts that your family can afford and match your family's risk tolerance, time horizon, and financial goals. In addition, start explaining money and saving to your child at a young age.
If you need guidance, I have an incredible financial course that will help guide you through the process and make the best decisions for your family's future. Contact me today!
Investing for your child may seem like a daunting task, but your child is worth the time and effort it takes to secure your kid a fantastic financial future.
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!