Spending

Holiday cash gifts 'can represent a big windfall' for kids, says money educator. Here's how to use them wisely

"As they become young adults, hopefully they'll see the benefit of investing early for long-term goals."

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When it comes to giving gifts, you can't always be thoughtful and creative. You're busy, you have a lot of holiday cheer to spread, and some people are just difficult to shop for.

Luckily, there's something most people like to pull from their stocking: money. Two-thirds of Americans would prefer to receive cash or a gift card rather than a physical gift from a close friend or family member, according to a new survey from Coinstar, which polled 2,007 gift-giving adults.

But if you're planning to give cash gifts to your young relatives, or expect your own child could be on the receiving end of one, it pays to think about how that money may fit into the child's financial education. "If you have cash gifts coming in, that can represent a big windfall, especially for younger kids," says Paul Golden, a spokesperson for the National Endowment for Financial Education. "That should typically spark a money conversation."

Here's how financial experts recommend handling money gifts to kids.

Parents: Work gifts into your kid's money framework

One smart way to incorporate gifts into your child's financial education is to establish a framework for what happens when money comes in. "Hopefully it's much like when you're giving a child an allowance," says Golden. "When the child is receiving money, that's a point of conversation that needs to happen: Make sure you're saving some of it, putting some of it toward other priorities, and you can spend the rest."

If you have it set up that a portion of your child's "income" goes toward various priorities, cash gifts can be broken down and deposited into the appropriate buckets, says John Lanza, author of "The Art of Allowance." "And for younger kids who aren't used to large sums of money, it's OK to split it up. Take the $50, put $25 in the bank for them, and give them the other $25."

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When it comes to older kids, you have less say on where the money goes, but it still makes sense to have a money conversation when gifts come in — especially around a time when they're receiving presents from lots of people.

Focus that conversation on how the windfall might fit into their existing money habits, says Golden. When his son received substantial financial gifts for his high school graduation, the two sat down and talked priorities. "He was normally saving 10% from his part-time job. I asked, 'Do you want to up that savings rate? Do you want to put a certain amount toward your car? What are your needs for school? Do you want to upgrade your laptop?'"

Seven months, later, Golden says, his son still has the gift money in savings. "He needs to think more about how he's going to use the money," he says. "But the key with the conversation is eliciting some thought about their finances."

Gift-givers: Communicate and consider alternatives to cash

Look, no one is saying you ought to feel bad about giving a little extra dough to the kids in your life. "Grandparents in particular have earned a privilege to spoil their grandchildren," Lanza says.

You're under no obligation to contribute to a kid's financial education, however, it can be smart to talk with their parents about how they might like to see the money divvied up. "If the parents make clear that this is a system they've implemented, maybe you label $5 for sharing, $5 for saving, and the rest for 'spend smart,"' he says. "That can be a creative way of doing it."

If you'd like to see your gift put toward a particular use, you might contribute directly to an account set up on the child's behalf, such as a 529 savings account for education expenses. "That's often the primary vehicle for any larger gifts that grandparents want to give," says Lanza. "Especially when the kids are little."

For teens who earn income and invest with a Roth IRA, a gift that they can contribute toward their retirement account can make a huge difference down the line, says Golden. "As they become young adults, hopefully they'll see the benefit of investing early for long-term goals," he says.

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Of course, gifting children money, especially when it comes to transferring funds between accounts, can get tricky come tax time, so make sure you talk with the child's parents along with a financial professional before making any such gifts.

And ultimately, even if you give the kid a big lump sum of no-strings-attached cash, you can still safely say you contributed to their financial literacy on some level. "At some point, they're going to spend the money you give them crazily, and that's OK," says Golden. "Part of financial education is learning from mistakes you make with money."

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