Fiscally-Responsible Gift Giving for Kids

The growing number of credit-card defaults and foreclosures serve as a sobering reminder of Americans' bad habit of overspending – and the market’s recent dip below 8,000 hasn’t made anyone feel more secure.

Now, as the year-end buying binge -- also known as the Christmas shopping season -- rapidly approaches, it appears that consumers feel a bit chastened about their frivolous spending ways. In fact, a recent Gallup poll found that the average American consumer estimates they'll spend just $616 on holiday shopping this year, a 10-year low. (Last year, Americans projected they'd spend $866).

For parents, this gift-giving season could be a prime time to teach their children -- or demonstrate themselves -- a bit of fiscal prudence, whether by contributing to their college fund (say, instead of giving them a Hannah Montana Malibu Beach House) or by giving them an opportunity to make a charitable contribution. “It’s important to get back to basics with kids. Explain the reality: It’s a tough season and everybody is affected by this,” says Neale Godfrey, chairwoman of Children’s Financial Network, which provides financial education services.

These money-wise gifts are one way to do just that -- and, even better, they don't involve waiting in line at Toys ‘R’ Us.

A savings bond as a stocking stuffer? Might as well give your kid fruitcake, right? It might seem old-fashioned to give a child a savings bond, but Troy Von Haefen, certified financial planner and president of Von Haefen Financial Management, says the investment is worth the befuddled look on your child's face Christmas morning. Series I Savings Bonds not only grow tax deferred, but those bought through April 2009 carry a not-too-shabby interest rate of 5.64% (the rate changes every six months), he explains.

One important caveat, says Von Haefen: Don’t put the bonds in the child’s name. Series I bonds (along with Series EE Savings Bonds) offer special tax benefits when used for qualified education expenses -- but they must be registered in the parents’ or grandparents’ name. (For more on the tax advantages of investing in these bonds, read our story). Savings bonds can be purchased at your local bank or at TreasuryDirect.gov.

One of the most valuable gifts you can give a child is an education. But considering that average tuition for a private four-year college is $25,143 for 2008-09, it’s wise to start saving as soon as your child says his first words.

One way to start saving is by setting up a 529 college savings plan. Withdrawals from 529s are exempt from federal (and sometimes state) taxes, as long as the money goes to qualified educational expenses, such as tuition and room and board. The best part: Grandparents (or other relatives) can contribute up to $12,000 this year to a child’s 529 without triggering any gift taxes. And, as an added bonus, contributions also carry estate-planning advantages since they reduce the size of the donor’s estate, thus lowering their federal estate taxes, says Harold Simansky, founder of Educational Investments, an advisory firm. (For more tax-friendly ways to help with a grandchild's tuition, read our story.)

Want to encourage family and friends to contribute to your child's 529 plan instead of their videogame collection? Ugift, a new feature from 529 plan administrator Upromise Investments, lets parents invite – via email or printout coupon – others to do just that. Seven states currently offer Ugift through their 529 plans, including Nevada, Arkansas and New York. Depending on the state, minimum gift amounts range between $15 and $25, says Liz Robinson, spokeswoman for Upromise.

(For a list of some of the best- and worst-performing 529 plans, read our story.)

Want your child to get in the giving spirit, too? Consider giving them a charity gift card that lets them decide where the money goes. These cards can be purchased at a handful of charitable web sites such as GlobalGiving.com, MarkMakers.org, or TisBest.org, which lets card recipients choose from one of 250 charities, ranging from the African Wildlife Foundation to the Boys & Girls Club of America. Because it “can only be given to one organization, the child must make an actual firm choice,” says Erik Marks, executive director of TisBest.

Keep in mind that these cards expire, so encourage your child to redeem them as soon as possible. Parents also shouldn't forget that these cards are tax deductible so make sure to take advantage.

(Read our story on ways to stretch your charitable gifts.)

As soon as they get to campus, college students are bombarded with credit-card offers. But developing good credit habits should come well before they leave for freshman orientation. With a prepaid debit card, parents can teach their children how to use plastic responsibly before dealing with the real thing, says Jon Gallo, co-author of "The Financially Intelligent Parent.”

Two such cards are Visa's (V) Buxx card or MasterCard’s (MC) Allow Card. These cards don't carry a line of credit so cardholders cannot exceed the prepaid amount of money on the card -- or hurt their credit score. Plus, parents can authorize friends or family to add money to the card.

Parents also get to track where and how much the teenager is spending. “This helps teens learn how to budget, how to think in terms of choices and alternatives, and whether something was a good purchase or not,” says Gallo. One caveat: The cards come with fees for account setup and penalties when they're lost.