By: Bruce Bahlmann

Each year children receive all kinds of cash gifts. Gifts from grandmas, aunts, uncles, and even just close friends. These cash gifts are not much, and range from $10-20 per birthday, baptism, or other significant event. Some parents just cash these and put them in their checking account to spend like any other earnings. But there is another way to think about these funds and if you capitalize on it now, your child will be grateful. The main idea here is invest these funds but if you do this intelligently, you can get ahead of the game.

Two keys to helping your child save

#1. MATCH - For each and every check my child receives, I try to match it one-for-one or double it (write an additional check) and send these checks into the savings account.

#2. INVEST AGGRESSIVELY - Select a small cap mutual fund that has a good track record and let it run.

Sounds easy, right? Just open an account at some investing firm and away you go. Not so fast! Most funds have a HEAVY initial funding requirement and if you can't pony up the funds for this requirement you might be stuck going to your local bank. For example today I called fidelity to open an account for my child. While Fidelity offers an account for "minors" the account is pretty much useless! First of all, you need to have at least $2,500 to open the "minor" account with Fidelity (same as any other fidelity account), but if that doesn't stop you the second obstacle may, Fidelity doesn't seem to understand the concept of having a "child" or "minor" account that you will want to fund sporadically. As a result, Fidelity tries to put you into this "adult" bucket which they like to treat the same as all their accounts. I'd suggest, if you don't have the initial funds to open just such an account, that rather than going to your local bank, you seek out PayPal.

PayPal pays the best money market interest rate. I've yet to find a firm that pays more. So, rather than going to your bank and earning 2% on a certificate of deposit, you open a PayPal account and send your child's money there until such time as you can afford to open an investment account. Once you have the account, the next step is figuring out how much to send in to the minor account. I've included a couple investment matches below for you to consider:

Simple Match (one-for-one match amount of cash gifts):

Adding it all up initially doesn't sound like much... Your child might pull in $50-75 a year in gifts during each of their life as a toddler. However, if you double or triple that amount and push the balance to a high-interest savings like PayPal, these small gifts eventually begin yielding serious money returns. For example, if you take an initial $75 your child receives for their first birthday, match that (write them a check for another $75), open a PayPal account with that money, and then every year their after do the same thing. By the time your child is 13, you can open an investment account with the money you have saved $2,500 in birthday money, matching, and interest. Once in an investment account, keep repeating this process and by the time your child is 19, you will have saved over $5,000. Not bad pocket change. If you don't let them dip into this till after college it will be worth over $8,000.

Super Match (double amount of cash gifts)

Doubling your child cash gifts brings you to the $2,500 minimum investment before your child turns 8. This has a significant impact on the amount of compounding time you have to work with. As a result, by the time your child is 19, you will have saved over $12,000 for your child. If you don't touch it till after your child is out of college, that amount raises to over $18,000.

If money is no issue for you, a simple investment of $2,500 and then doubling your child's cash gifts each year for the next 23 years until they get out of college will leave them with well over $36,000 to start their life with.

(C) Copyright Birds-Eye.Net, All rights reserved.
It is against the law to reproduce this content or any portion of it in any form without the explicit written permission of Birds-Eye Network Services, LLC. Federal copyright law (17 USC 504) makes it illegal, punishable with fines up to $100,000 per violation plus attorney's fees.