This scenario happens all too often: Your daughter just turned two so you have family and some friends over to celebrate. The cake has settled and the games have been played. It is now time for the best part of the party – the giving of presents to the young’n.

The range of gifts will most likely be diverse. Some people will give clothes, some will give books or other educational material, and yet others will give cash, savings bonds, checks, or gift cards.

 

Parents are then placed in the tough situation of deciding what to do with the gifts. The two-year old child obviously does not have the capacity to decide what they would like to do with their gifts. This is more of a concern with the gifts that have some monetary value, for obvious reasons (I’m sure they can figure out what to do with the toys!).

As a parent, what are your options?

Daddy needs some new jeans

The thought process goes as follows: As a two-year old, what could the child possibly use the money for? A hundred bucks will help YOU out more than it will help your toddler. Besides, you spend a fortune raising the kid. What could you spend the 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
• Supporting 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 child.
• Filling 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. Bloomin onions and an Outback special go great together!
• Getting some new clothes. Gotta look good for the interview tomorrow. Make sure to grab a slick looking Trump tie.

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

The most likely intention of people who gave cash and credit cards was that they weren’t sure exactly what your child needed. So if you like shopping and getting to treat your child to whatever they want (within reason), this is a pretty good option for you.

• Take a trip to Kids R’ Us, its the beginning of a new season! 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 or a like-themed park! 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!

However you decide to go about using the gift money, this option allows the child to reap the benefit of the gift fully. I am assuming most parents do this, at least from my experience. Is there anyone who chooses not to do this? Why or why not?

I think, when placed in this situation, I would look at my child’s belongings and think they have too many material possessions as is. Yep, THAT Dad.

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! 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 your child always deposits portions of their gifts and allowances so that the idea of saving x% is engrained into their outlook on money. After 15 years of saving, they will most definitely thank you when they are able to handle their own finances heading into college. They’ll probably be excited at the cash balance, too. Word of caution: The financial aid formula assumes students will contribute 35% of their assets towards the costs and parents put up 6% of their savings. If you set up a savings account for them and they save a lot, they could hurt their ability to get financial aid.
• Roth IRA or Coverdell Education Savings Account (formerly Education IRA)! Both allow you to invest in mutual funds, stocks, or bonds. Contributions are after-tax and grow tax-free, 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. Your child will most definitely need money in their elementary and secondary years, whereas college attendance can be a toss-up. A limitation on the Roth IRA is that your child has to have earned income.
• Section 529 Plan! Section 529 plans do NOT count as a student’s assets when it is calculated for financial aid. This makes for a great planning tool for college. If your parents (the child’s grandparens) set up the 529, the 529 won’t even be counted in your portion of the formula. 529’s are able to be rolled over into another beneficiary (just in case they choose against college!).

These three options are 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 no definitive answer to my original question… Who are kid’s gifts for? This was more of a thought exercise. 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!

Even though this is a semi-personal issue, would anyone like to give any insight into how they do this with their kids?