Giving Money to Grandchildren Can Be a Time to Teach Values

As Christmas and the year-end draw near, those of us who are grandparents may be thinking of how best to gift money to our grandchildren. While you can give cash, that’s not always the best solution.

In this article, we will explore smart strategies for giving money to grandchildren that benefit the children and do no harm. 

Can You Afford it?

We all have soft hearts when it comes to our children and especially our grandchildren. We want them to have a good life, an even better life than we had. Our tendency is to give, give, and give some more. 

Before doing so, we need to first assess our own short and long-term financial needs. There’s an old saying that we shouldn’t give away our teeth until we’ve finished eating, and the same logic applies to our money. Life is expensive. The future is unknown. You never know what extraordinary expenses await down the road, including long-term care, coping with dementia or other debilitating diseases, or other unforeseen costs. 

If we give too much away, especially during our early retirement years, and then come up short of money later in life, who is going to rescue us? Don’t assume your children or grandchildren will come to your rescue, even if they are financially able to do so. 

What is the Goal?

Before handing over cash to the grands, it helps to reflect on what you want to accomplish. If you simply want to put some spending money in their pockets, then a modest cash gift works fine. Giving them an envelope with cash is a common practice in many families. Older children and teens, especially, may prefer cash at Christmas over toys, clothing, and gadgets.

Done right, giving money can be an effective tool for teaching values to your grandchildren and helping them manage money better. For younger children, teach them that for every dollar they receive (including money you give them), a portion should go toward savings, a portion for spending, and a portion for giving away. You can set up an envelope system or something similar where 50 cents of each dollar received is for spending, 25 cents goes toward saving, and 25 cents is put aside for giving to their church, a needy family, or a special charitable cause. 

Your objectives are to instill noble values and good financial habits into your grandchildren. You want to discourage their me-first greed, develop discipline and delayed gratification, and teach them to show compassion for others.

The savings portion in the above example can be adjusted depending on the age of the child. For younger children, the savings needs to be for something shorter term, tangible, and achievable. Help your grandchildren set goals. It could be as simple as saving $5 to buy their own ice cream treat, $20 for a book or toy they want, or saving a few hundred dollars for a new bicycle or gaming console. The point is to teach goal-setting and other good money-management habits. What they choose to buy with their savings isn’t the point.

For teenagers, the savings goals should be longer-term and more challenging. Starting as early as age 12 or 13, you might guide your grandchildren to start saving for their first car. If you are gifting them larger sums of money or they are earning money of their own from jobs, then larger goals such as saving for college expenses may be appropriate. 

Partner With your Children

Ideally, you need the cooperation of your children and their spouses (the parents) to effectively execute age-appropriate money habits. Before giving money to grandchildren, talk first with the parents and get them onboard. Together, agree to a longer-term plan for how to handle gifting and other money-related matters with the grandchildren. Always respect the fact that the parents are in charge and let them know you are here to reinforce and support their decisions when it comes to the grandchildren and their welfare.

If family dynamics make it possible, also involve the other set of grandparents. It’s going to send mixed messages to the grandchildren if you are trying to teach restraint and discipline while the other grandparents are lavishing them with too many gifts and easy cash. 

Matched Savings Plans

For older children, a great way to help them financially while also teaching good money-management skills is to set up a matched savings plan. These can take various forms. 

Financial guru Dave Ramsey incentivized his own children to save money during their teen years by promising to match how much money they saved in their car fund. If they saved $5,000 by their 16th birthday, Dave and his wife Sharon matched it dollar-for-dollar, so the child could purchase a $10,000 car. 

In my opinion, this is far better than merely buying a car for a 16-year-old. To fully appreciate owning a car, a child needs to have some skin in the game. They need to understand that it takes years of hard work and discipline to achieve big goals. 

Setting up a matched savings plan also teaches your grandchildren the value of work. No matter how wealthy you or the parents may be, children need experience working and earning their own money. 

Like many of you from the Boomer generation, it seems I have always held a job. Starting around age 10, I mowed neighbors’ yards, earning $5 per yard. During my teen years, I had a newspaper delivery route. I threw those newspapers using a bicycle I bought myself. My parents taught me that if you were old enough to ride a full-size bicycle, you were old enough to save your money and pay for it. Not surprisingly, I took better care of my bike than some of the other kids in the neighborhood. You never found my bicycle laying in the front yard overnight or left out in the rain. 

I also pumped gas at filling stations, flipped hamburgers, worked in a library, and did other odd jobs. Most of those were minimum-wage jobs paying around $1.35 per hour, but I’m grateful for them. Working during middle and high school taught me independence, the value of work and money, and built my sense of worth and confidence. 

As an aside, I taught for 10 years at a university and was shocked by the number of students who at ages 20 to 22 had never held a real job. Mom and dad (or maybe the grandparents) gave them a credit card and paid for all their needs and wants. While well-intentioned, in my opinion their generosity handicapped these young adults and gave them unrealistic expectations for the future. 

So rather than giving a teenager money with no strings attached, a better idea may be to agree to match what they save from jobs. This will encourage them to seek work rather than sitting around the house playing video games (or whatever). If they still want to play video games after their jobs and homework are finished, make sure THEY pay for those video games out of what they earn from their jobs, rather than asking the parents (or you) for spending money.

Saving for the Grandchildren’s College Expenses

The cost of attending a four-year university these days is unbelievable. According to the Education Data Initiative, college students spend on average $35,720 per year, including tuition, room, board, and other expenses. That cost has tripled during the past 20 years. When I attended college, I was able to pay most of the cost each semester from part-time jobs. Nowadays, that’s much harder to do. As a result, student loan debt is at a crisis point. The average college graduate has nearly $30,000 in student-loan debt, and many have much more. Thinking back to my years as a college instructor, I recall visiting with one student who had $80,000 in debt and was majoring in a relatively low-paying career field with poor job prospects. That’s a tough hole to climb out of.

Grandparents who are comfortable with their own financial situation and have available funds to gift can make a wonderful investment in their grandchildren’s future by helping pay for their college expenses. Similar to saving for retirement, it pays to start early. Ideally, start contributing to the grandchildren’s college funds while they are still in diapers. If you contribute on a monthly or annual basis throughout your grandchildren’s childhood and adolescent years, you can accumulate enough to offset a significant portion of their college expenses.

As I said previously about buying your grandchild a car, no matter how wealthy you may be, I would not pay 100 percent of a grandchild’s university expenses. They need to have skin in the game by working and saving to pay a portion of their costs. They will have more self-respect and a greater appreciation for their degree.

Ways to Save for College

One of the best investment vehicles for saving for a child’s college education is a 529 plan. Once established, anyone can make contributions to the plan, including parents and grandparents. While money put into a 529 plan can pay for private school expenses during the K-12 years, most often these savings plans are used for college expenses.

While it’s beyond the scope of this article to go into detail about 529 plans, here are some key points to keep in mind:

• 529 plans are tax advantaged. There’s no upfront federal tax break for investing money in a 529 plan but the accounts grow on a tax-free basis and no tax is due when proceeds are withdrawn, provided they are used for qualified educational expenses.
• Not all 529 plans are alike. There are more than 100 plans to choose from, including plans operated by each state. Each offers differing investment choices and fee structures. It pays to shop around, looking for plans with high-performing, low-fee investments. You do not have to buy your own state’s plan but may buy from another state if you think it offers a better choice of investments or lower fees.
• 529 plans offer flexible withdrawal options. The definition of “qualified educational expenses” is broad. For instance, dormitory or housing expenses qualify. Plus, if your grandchild gets an all-expenses paid scholarship (smart kid) or joins one of the military academies, there is no tax penalty for withdrawing proceeds from the plan, although income taxes will still be due on the account’s appreciation when withdrawn. If your grandchild doesn’t go to college or finishes school and still has money left in the 529 plan, remaining proceeds may be used by other qualifying family members, including siblings, and still avoid tax. 

As you can see, 529 plans are full of benefits but also complex. You and the parents will need to do your research or consult an adviser. For a more detailed overview of 529 plans, see this story.

Saving for a Grandchild’s Retirement

Grandparents most commonly gift larger sums of money to the grandchildren to help pay for their first car, college expenses, or even their first house. Those are all great ways to help your grandchildren get started in life. 

Another interesting way to making a lasting impact on a grandchild’s future is to set up and fund an IRA account in their name. More precisely, set up a ROTH IRA, which requires no tax payments when the money is withdrawn during retirement. Imagine the benefits of having your grandchild’s retirement nest-egg grow and compound for five or six decades, tax free if not withdrawn prior to retirement. The results can be impressive. 

Let’s look at an example of the power of a ROTH IRA started when a child is still a minor. Assume you fund a grandchild’s ROTH IRA for the final five years of his or her schooling, grades 8 – 12. You do so by investing $6,000 per year into their account, the current maximum annual contribution. So by age 18, the grandchild has an account with $30,000, plus whatever earnings have already accumulated. If that account stays intact (no premature withdrawals) until the grandchild is 68, with no additional investments being made, it would be worth $884,000! That’s assuming an annual average rate of growth of 7 percent. 

One caveat is that the grandchild has to have earned income from a job or business. You cannot invest more per year into the ROTH IRA than what he or she earns.

If the grandchild does not earn money during the teen years, then another opportunity to help them may come when they secure their first real job after graduating from college or trade school. Teach them to start saving for retirement with their first paycheck. Offer to help them set up a ROTH IRA and agree to match the amount they contribute each year. The money they (and you) invest in their retirement account during their 20s and 30s will give them a promising start toward their later retirement. Most of their peers won’t even start thinking about saving for retirement until their 40s or 50s, and by then it is very hard to grow a large enough nest-egg to fund the retirement years.

Teaching Financial Literacy

Perhaps the best gift of all we can give to our grandchildren is financial literacy. Sadly, too many people in our society, young and old, do not understand the basics of how to manage money, avoid debt, save and invest for the future, and make sound financial decisions. 

As grandparents, we have the opportunity to teach and mentor our grandchildren about money. In the end, teaching our grandchildren how to earn, manage, and save their money will be of far greater value to them than any gift they unwrap under the Christmas tree or a check we hand to them. 

It’s important to be intentional about teaching positive values to our grandchildren, including about money. We are only a strong influence in their lives for a relatively short number of years. It’s fine to look for teachable moments, but sometimes we have to be more intentional and make teachable moments happen. 

While we need to be personally involved in talking to our grandchildren on these topics in age-appropriate ways, there are also a number of good resources to make the job easier. Earlier in this story I mentioned popular Christian money management authority Dave Ramsey. His organization has numerous books and other resources for children as young as three and going all the way through college and young adult years. These can be great teaching tools for you and the parents. Click the link above and scroll through some of the choices. 

To explore even more resources for teaching children about money, see this list from CNBC (for younger children) or this excellent list of online resources.