What to do When Your Children Receive Money

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shutterstock_59619307Children often receive money as a gift. When they’re young, the money is given to their parents. Even when they’re older, the money is sometimes given to their parents. So what should you do with the money your children receive? Here are several options:

Open a savings account – You could open a savings account in your child’s name and deposit the gift money there. Just note that when your child turns 18, he or she will have full access to the money. However, if you keep the account in your name only, some banks may refuse to deposit checks made out to your child.

Open an investment account – If you don’t plan on touching your child’s gift money gifted for a number of years, you can invest the money on their behalf. If invested conservatively, the money should grow faster than it would in a regular savings account. As with a savings account, you can open the investment account in their name or in your own name, again with the caveat that your child will have full access to the account upon turning 18.

Invest in your child’s education – You can invest the gift money in a 529 or Coverdell Education Savings Account, and let it grow tax-free to help pay for your child’s future education.

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Use the money as a teaching opportunity – As with allowances, gift money can be used to teach your children how to manage money. Some parents choose to have children divide their money into spending money, savings, and charity. If your child wants something that you do not want to purchase for them, monetary gifts and/or allowances can be used to teach children delayed gratification, prioritization, and how to save up to pay cash for a big ticket item. You could even teach them about credit and paying interest by offering to lend them money to cover the difference between how much they have and how much they need to pay for their desired object.

Decide whether to tell your children about their monetary gifts – If you’ve decided to use the money as a teaching opportunity, this section may not apply to you. But if you’ve decided to save or invest your child’s gift money, you’ll have to decide whether to tell them about it, and how much to tell them, especially as the funds add up.

Watching the total amount grow can teach a child about compound growth, and motivate them to save more. But on the other hand, you may not want your child blurting out to someone that they have several hundred or even thousands of dollars in savings.

My children are still fairly young, so personally, I’ve chosen a middle road: I tell my children that they’ve received money as a gift so they can thank the giver, but I don’t tell them how much they received or the total that’s been saved up in their name. As they get older, I’ll probably transition to using monetary gifts to teach them about managing money by encouraging them to save a portion, give away a portion, and letting them spend the rest. But for now, I’m happy to invest their gifts on their behalf.

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Cathy is the founder of Chief Family Officer, where you can get daily updates on the hottest deals, and tips to achieve financial freedom and family bliss.