'It's MY Money, Mom': What to Do When Kids Get Cash Gifts

Cash gift
Did your new high school graduate just rake in a few hundred dollars from congratulatory friends and family? Birthdays, bar and bat mitzvahs, and confirmations can also be quite lucrative for kids.

Money gifts can be both a blessing and a curse depending on the age of the recipient and the money personalities of the parents and their offspring. While clearly an infant has no say in what happens to funds given in honor of her birth, older children may balk at having their gift cash controlled by their parents.

"Parents need to train their kids as they're growing up, giving them a chance to make mistakes as well as the tools to help them learn from those mistakes," says Ellen Miley Perry, a wealth management advisor with Wealthbridge Partners in Washington, D.C., and author of "A Wealth of Possibilities: Navigating Family, Money, and Legacy." "If you've controlled your kids too much and they get a cash gift when they're old enough to control it themselves, it's like handing your car keys to a kid who's never learned to drive."

Perry says more affluent parents have a tendency to bail their kids out rather than letting them take the natural consequences of making a mistake with their money. But parents in families without a lot of money have an even harder time letting their kids control their own cash.

She recommends making the effort to not place your own emotional baggage about money on your kids. "It's hard to step back and let your kids make mistakes, but if you don't, you're taking the ability to learn out of the equation," says Perry. She recommends "Raising Financially Fit Kids" by Joline Godfrey as an excellent guide to teaching your kids about money.

Of course, it's one thing to let your kid blow a hundred bucks and quite another to watch them fritter away thousands of dollars of bar mitzvah dough.

Teach Your Children Wealth

Guy Penn, principal of G.M. Penn Wealth Management in O'Fallon, Mo., says the true gift of a monetary windfall is the opportunity for a teaching moment. "The process of prioritizing and discussing the various options is a gift more powerful than the actual funds being given," he says.

Penn recommends that parents list various options for gift funds into "buckets" such as short-term saving for fun and long-term saving for a car or college and then craft a plan together on getting there.

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"Take the child into the bank and sit down with a banker to talk about various options such as savings accounts versus CDs," he says. "This process will help ensure your child develops a sense of trust and comfort with the banking system."

The exact age when a child is ready to participate in investment decisions depends on your offspring's money personality and skills. You need to bear in mind the financial maturity of the child.

Rich Arzaga, Founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., says that up until a child is 10 years old, parents should make all the investment decisions, based on their goals, risk tolerance, and time horizons. "After age 10, parents have an opportunity to include their children in how their money is invested. This can even turn into a family meeting."

Arzaga says that you can demonstrate how different types of investments work. Parents can suggest using a few different mutual funds, such as a bond fund, a large company fund, a small- or medium-cap company fund, and an international fund.

"The goal here is to learn how these different accounts act under different market conditions," says Arzaga. "This will allow children, and their parents, to learn that to some extent they can choose risk and potential reward based on the type of fund they choose. After age 10, and certainly by age 14, children appreciate this discussion, and seeing their own money move up and down."

Arzaga says the key is to keep your cool as parents when responding to up or down markets. "The goal is to remove as much of the emotion out of the investment process as possible," he says.

Teaching Fiscal Responsibility

Parents are the guardians or custodians of the money in different types of accounts, and legally have full control over most types of accounts until the child comes of age, typically at 18 or 21, depending on the state. "In fact, parents should view this as a fiduciary responsibility," Arzaga says.

One important exception is 529 college savings accounts, where the adult owner has the control and the children are simply the beneficiaries, Arzaga says. While most 529 accounts are owned by parents, grandparents or other relatives may open them as well.

Earnings in accounts under the Uniform Gift to Minors Act and the Uniform Trust to Minors Act are taxed to the minor, but up to $1,000 of the earnings are tax exempt. Up to $14,000 annually in gift transfers into these accounts and into 529 accounts are excluded from taxes.

Most banks offer special savings accounts for children with minimal deposit and balance requirements. You can also open joint accounts with your minor child, including a CD or checking account.

Become the Bank of Dad

Arzaga introduced his daughter to investing at an early age and matches her investments from what he calls "The Bank of Dad." He says that the out-of-pocket cost is a small price to pay to teach his daughter the long-term habit of savings.

Taking a collaborative approach rather than a controlling approach to financial gifts can set your child on a path to financial security.

6 Money Leaks That Are Draining Your Finances
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'It's MY Money, Mom': What to Do When Kids Get Cash Gifts

In a 2011 study, Billshrink.com found that Americans overpay $336 a year on their wireless plans. Why? Because they incorrectly estimate how many minutes, text messages and megabytes of data they need. When you're paying for minutes, messages and megabytes you don't use, that money leaks away every month.

To stem the tide, one of the best things you can do is treat your cell phone as you would your bank account-that is, track your "spending." Note (either on your bill or by calling your provider directly) how much you're actually using your cell phone. How many of your allotted minutes are you using? How many messages are left over at the end of the month? How much data did you pay for and not use?

It's good to know your cell phone tendencies, anyway: CNN Money estimates that five years down the road, with the institution of 4G networks and the resulting ease of data usage, cell phone bills could balloon by $40 a month. If you're a big data user, this might be an issue for you.

If you find that the plan you're paying for hardly reflects the plan you have, it's time to speak to your provider about a new arrangement. Use our nine steps to negotiate your cell phone bill (including a sample script!) to get started.

DailyFinance estimates that hidden charges on your monthly bills could cost you an extra $350 per year. There are two main ways this happens: "cost creep" and "zombie charges." Cost creep is an incremental price increase on your bill each month by only a few dollars for previously free-or at least unspecified-services like paper statements (bank) or a digital box (cable). Zombie charges are the charges deducted from your account after you've already canceled your service, while the company "processes your request." Look out for these culprits on any monthly bills, from phone and cable to bank statements.

For example, last year Wells Fargo started charging customers in six states $5 for an electronic statement and $7 for a paper statement. Verizon attempted to introduce a $2 convenience fee for phone and online payments, and Bank of America had a plan in place to charge its customers $5 per month for their debit card accounts. Even though the two latter plans were eventually scrapped, it's still important to keep an eye on your monthly statements.

The easiest way to fight this leak is to call the company directly. If you notice your bill going up without clear communication as to why, or with charges that you didn't approve, let them know that you've noticed and you'd like to return to the rate you agreed on. And when canceling a service, be extremely clear that you'd like the charges to end immediately and take note of the date. If you're still getting bills after that cycle, it's time to make another call.

The Self Storage Association reports that 10% of United States households used self storage in 2012, up from 6% in 1995. That's 10.8 million households whose things are out of sight, out of mind ... and costing them a big chunk of change, just in case they ever want to use those vintage snowshoes again.

If you have a storage unit, you may want to revisit that decision. Storage unit fees can run as much as $255 per month. And MSN Money points out that not only are most of the possessions you're storing depreciating in value as they sit, they're also at the mercy of the storage company-if you stop paying your bill, the company can auction your possessions off to the highest bidder.

If you're considering getting a unit, see what you can sell, donate or discard instead. (You could actually earn money instead if you sell used stuff on eBay; for example, one of our editor's moms recently scored herself an extra $5,000 in retirement savings by finally selling all of the used Star Wars paraphernalia taking up space in her attic.) Even if you can't be bothered to sell your excess possessions, they'll cost you less to donate or discard than to store in a unit. If you already have a storage unit bill every month, set aside a weekend to clean it out. Again: Throwing it all away is cheaper than keeping it "just in case."

The next time you want to do some large-scale DIY project, don't buy that heavy-duty pressure washer when you can rent one for a few days at a fraction of the cost. The same goes for shampooing your carpets and performing landscaping tasks. Because let's be honest: How many times a year will you need these specialized tools?

At Home Depot, you can rent a 1400 PSI pressure washer for $35 a day or buy a similar model for $100. If you're going to complete your power-washing on a Saturday afternoon, you'll save $65 and some serious storage space.

And, a little-known tip: Home Depot offers both a four-hour rate (in the case of our power washer, $25) and a daily rate for its rental options. At some locations, if you pick up an item after 6 p.m. and return it the next day before 9 a.m., you're only charged the four-hour rate-an excellent way to save money on short-term projects that don't require a lot of sunlight.

The United States Bureau of Labor Statistics estimates that in 2011-the most recent data available-the average American spent $2,160 for telephone, cellphone and internet services, which is 21% more than she spent in 2006. Much like with your wireless plan, paying monthly for a level of service you don't use just lets money slip through the cracks.

If you're using all of these services (because of course, another option is to cancel a service and become a zero-TV household), you may want to consider bundling-that is, getting all of your services from the same provider. Because you're committing a larger amount of money to one company, they're usually able to offer you discounts on bundled packages.

And it's not just for utilities-bundling applies to insurance policies too. You can do the same with your auto, homeowner's, renter's and even life insurance policies. Insurance companies prefer to have customers with multiple policies and are willing to offer discounts to retain them, as bringing in and processing new customers is more expensive on their end than knocking a few bucks off your monthly payment.

But remember that bundling isn't a magic price fix. Be sure to do the math-is bundling with one company actually cheaper than paying for each service (or policy) individually? It's only a leak if you're losing money. When negotiating, be sure to ask for a rate that won't change-you don't want to pay a better price for the first six months, only to see the charges rocket upwards once you're out of the introductory period.

If you think you're doing yourself a favor by hoarding your credit card rewards, think again. While it's commendable that you're saving for those airline tickets to Tahiti, a 2011 study from Colloquy.com found that the average consumer ultimately doesn't redeem a third of his rewards-or about $205 every year.

Your rewards are only rewarding if you have a concrete plan in place to spend them. Otherwise, they're just building up bit by bit, but you'll wind up leaving money on the table if you cancel your card, let your points or miles expire, miss a payment, or the company changes its program altogether.

Plus, if you get cash-back rewards, you can redeem them monthly and apply that small sum to your credit card balance, freeing up your own hard-earned cash to use on something you really need. They can also be a good way to start (or bulk up) your emergency fund. Unused cash rewards don't earn interest, which is why you're basically wasting money by just letting them sit.

If you don't understand the nuances of your rewards program, give your credit card company a call and ask them to explain it to you. Otherwise, set a goal to use your rewards in the near future, before they slip down the drain.

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