A Great Financial Gift For Kids

It’s very important that you teach your kids how to manage their money at an early age. Financial literacy is important because it teaches your kids how to manage all of the financial resources that they have at their disposal. These financial lessons will last beyond the childhood years and into adulthood. Since there is no time like the present; this is a great time to teach your kids the keys to financial responsibility and proper money management. One of the great ways to do this is by starting with a great financial gift for kids starting them off with one of the safest financial investments around.

Buy A Savings Bond!

It may be old fashioned but buying a savings bond is still one of the safest investments that you can get. It’s a great gift for your son, daughter, niece, nephew, grandson, granddaughter, or other loved ones. Savings bonds are a great financial gift for kids. These bonds are sold by the United States Treasury to fund government operations. Savings bonds are 100 percent guaranteed and backed by the full faith of the United States government. Savings bonds are risk free debt securities meaning that you cannot lose money. They are also one of the safest investments that you can get for your children. Savings bonds are a good starting investment because they are guaranteed to increase in value over time.

Savings Bond Characteristics

Savings bonds are tax deferred investments since you don’t have to pay any federal taxes on gains until redemption. Savings bonds can be purchased in your kid’s names. Savings bonds can be purchased in electronic form from the United States government website at www.treasurydirect.gov. The Treasury Direct website also allows you to open an account yourself and buy bonds for your children as gifts. Savings bonds can be bought for as little as $25 in penny increments. (You can buy a bond for $25.01.) The maximum purchase in a year is $10,000. Savings bonds earn interest on a monthly basis and the interest is compounded semiannually. Bonds can be redeemed after 12 months. It is important to note that you forfeit the last 3 months of interest, if you cash in the bond sooner than 5 years.

EE Bonds

EE bonds pay a fixed rate of interest for 30 years. This means you lock in the interest rate received at purchase for 30 years. Interest accumulates for up to 30 years. They are only taxable at the federal level as they are state and local income tax free. Taxes are only paid upon the sale of the bonds. EE bonds are a good investment during times when interest rates are high and you want to lock in a high rate for a number of years. You can lock in a great rate when interest is high. But as the past decade has shown, EE bonds are no so hot during low interest times like now as you would lock in a rate substantially below 1 percent for 30 years of more. The best selling part of EE bonds is that the face value used to double in value after 30 years. Since 2012, EE bonds no longer offer this feature making them the lesser of the two types of savings bonds in my opinion.

I Bonds

I Bonds are my preferred choice of savings bonds. They are a great financial gift for kids. I bonds are inflation indexed bonds that pay both (1) a fixed rate of interest and a (2) variable rate of interest which is linked to the semiannual rate of inflation (rates are calculated every May and November). They have the same features and requirements as EE bonds but are currently paying a much higher rate. An EE bond is currently paying 0.10% in interest whereas in I bond is paying 1.90%. That’s 19 times the rate of return on an E bond. I think that an I bond is a much better deal and own a number of I bonds myself. They are a good deal if you expect inflation to rise over the next few years as I do. 

Savings bonds are a great safe investment to purchase and hold as a graduation gift for your kids, paying for college, buying a home, leaving as an inheritance, or gifting to your child. These bonds teach kids the power of compound interest and the importance of keeping your principal safe. A small financial gift for your children today can pay off big time in the future.