529 College Savings Plan Stocking Stuffers: An Alternative Approach to Holiday Gifts

Now that we’re almost done stealing our kids’ Halloween candy, we can turn ever so slightly in the direction of the upcoming holiday and gift-giving season. In my wife’s and my families, we are, admittedly, the odd ducks when it comes to gift giving, at least as it relates to nieces and nephews. With a few rare exceptions that actually escape me at the moment, we rarely send gifts for birthdays and holidays, at least in the traditional sense.

No, we don’t send socks or atrocious sweaters or gift certificates for hugs. Instead, for every birthday and holiday, we’ve made contributions to our nieces’ and nephews’ 529 College Savings Plans.

If you happen to corner an economist at a holiday party this year, ask them to explain to you how members of their profession view the concept of gifts. I’ll spare you: economists think gifts are pretty silly. Or, to be fair, they think they are highly inefficient. Think about it for just a moment: how many gifts have you received that have been truly special? How many times would you have simply rather preferred the cash value of the gift? Based on years of survey research, economist Joel Waldfogel of Wharton suggests that, on average, gifts bring us about 20% less satisfaction than spending we do for ourselves (http://www.npr.org/blogs/money/2009/11/podcast_happy_efficent_holiday.html).

I’m not an economist. But I do see how my kids treat the gifts they receive. Every once in a while, a friend or relative stumbles upon a true winner. But for the most part, even my wife and I can’t really predict which items my kids are really going to treasure and which ones are going to end up on the Island of Misfit Toys.

Eventually, as our kids and nieces and nephews get older and develop longer lasting tastes and interests, that might change. We’re not humbugs, though. We still want to give something, which is why the 529 College Savings Plans work perfectly for us.

Education is a big thing to us, and we know that the cost of college is going up markedly faster than when we were in school. Our gifts alone aren’t going to pay for college, but they’ll help. And the value of those gifts will far outweigh the cost. Just as an example, if we make two $30 gifts each year (birthdays and holidays) for 18 years, we’ll effectively have gifted a niece or nephew $1,080. But if those gifts go into a 529 College Savings plan that earns 5%/year, the value of those combined gifts will have grown to over $1,700. I doubt that the same can be said about the various bits of Frozen paraphernalia that likely will still dominate shopping lists this winter, though I suppose you never know. (For the record, I’m on Team Anna.)

Again, that $1,700 is going to be small potatoes compared to the ultimate bill. And yes, it’s hard to explain the concept of the time value of money to a 5-year old. But at least at the moment, it’s a gifting strategy that fits the values of our family.

We’ve talked to a lot of Woodward Financial Advisors clients about the merits of gifting to 529 Plans for nieces, nephews and grandkids. If anything in this post resonates with you, let us know. After all, ‘tis the season.