Ask Money

Money gift for baby

Chris Farrell Sep 21, 2010

Question: I remember cashing in bonds that were given to my parents as gifts when I was born. My brother is about to have his first child. I wanted to give the parents some sort of investment when the baby is born that will gain value over time. I’m not sure bonds are the way to go. Do you have any suggestions? Kelly, Cincinnati, OH

Answer: What you’re remembering are good ol’ U.S. savings bonds. It’s a classic. Savings bonds are still a thoughtful gift, especially if you buy the I-bond version. The I-bond is designed to be a hedge against inflation. Every dollar you invest will be worth a dollar plus some interest in the future when the bonds are cashed in. I like savings bonds as gifts.

The return on an I-bond is made up of two parts: a fixed rate of interest and a rate that adjusts to changes in the consumer price index or CPI. The investment compounds tax-deferred and there are no commission costs to buy it or to sell it. Taxes are paid on the gain at sale. I-bonds redeemed before the 5 year mark forfeit the 3 most recent months’ interest, but after 5 years that there is no penalty for redeeming them. You can buy up to $10,000 worth a year. Savings bonds are simple and creditworthy.

There are riskier alternatives (that would also take more of your money.) You could buy a low-fee mutual fund. It could be an equity index fund such as the S&P 500 equity index fund (it captures Big Business in America) and the Wilshire 5000 Total Market Index (it reflects the universe of publically traded U.S. stocks, big and small.) Alternatively, since I’m a big believer in diversification, you could buy a low-cost mutual fund with a balance of stocks and bonds, maybe even a “target date” fund that gets more conservative as the baby ages.

Does anyone have any other suggestions, maybe a gift of an investment that worked for you?

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