It’s the day after the Lunar New Year (widely known at Chinese New Year), and your child’s pockets are stuffed with red envelopes full of lucky money. They’re ready to go out and spend it all on the latest video game or some other high-tech toy to occupy their free time. Before you take them to the mall or give them access to your credit card so they can buy something on Amazon.com, take this amazing opportunity to teach them about saving and wealth building.
My suggestion is to allow them free use of the cash on a scale based on their age. The rest would go towards savings or investing for their future. Here is an example of how you can set their lucky money spending limits:
- Ages 5 and under: Allow 10% for spending, Set aside 90% savings.
- Ages 5-10: 25% for spending, 75% for savings.
- Ages 10-15: 50% for spending, 50% for savings.
- Ages 15-17: 75% for spending, 25% for savings.
Their entire savings doesn’t have to be locked away for education or retirement either. Allow your child to set up their own short-term and long-term goal with a portion of their savings. This will give them an incentive to set aside money and help teach them how to save up for big ticket purchases. You can encourage them to save by giving them a match too.
Top 5 Ways To Use Lucky Money
- Start a Coverdell ESA. Formerly known as an Education IRA, this type of education savings account works much like Roth IRA’s. The major benefit of this type of account is that it “belongs” to the parent or whomever holds the account, earnings are tax free, and withdrawals are not considered income for the account owner or the student. This gives you a huge advantage when applying for financial aid.
- Start a 529 Plan. 529 plans are college savings plans that are sponsored by individual states. Again, like Roth IRA’s, they allow for tax-free distributions. If set up properly, money invested in 529 plans are not counted in financial aid calculations. Many states also have tax-deductions available for contributions to 529 plans.
- Open a Savings Account. The simplest way to to save for anything is to open a savings account. Many banks like USAA, and credit unions like SchoolsFirst FCU, have special savings accounts geared towards children or teenagers that have preferential interest rates.
- Invest In Stocks or Mutual Funds. Consider opening a custodial investment account and investing in stocks of companies that interest your child. This is a great way to get them interested in investing and to teach them about the stock market. Companies like Disney, General Mills, Proctor & Gamble, all make products that your children probably interact with or consume on a daily basis. They can learn more about the things they use and where they come from too.
- Give. There has never been a better time to teach how to give than now. Children can learn many lessons when donating to a good cause. Help them pick a great and reputable charitable organization at Charity Navigator and get them started on a lifelong habit of selflessness.