Curious what to do with a gift of money? Receiving an inheritance or overly generous wedding gift? Here's how to make the most of it!

How to Treat a Money Gift

How to treat a money gift?

This is a guest post from Pauline of InvestmentZen.com

When I was a teen, Christmas and birthday presents started to go from physical gifts to checks. At first, I was pleasantly surprised, thinking “Awesome! No more boring books and lame CDs (I am that old), I can finally buy whatever I want!”. As I grew older, I got a little more cynical about the person’s laziness and inability to take an hour to think, buy and wrap something thoughtful. Whether you give or receive $20 or $20,000, it always come from a good place. Monetary gifts have been a great way to pass on wealth to the next generation. But how to you handle money as a gift?

Receiving money from your parents or loved ones

Receiving money from your parents or family members always comes with the best intentions, even though it might make you feel uncomfortable. While I accept the birthday and Christmas gifts gracefully, I have always turned down bigger windfalls because I felt guilty that my parents had worked hard to save, and wanted to give me the fruit of their efforts while they could still enjoy life. Now that I am older, I might accept the offer if it comes again, because they can do so tax free, and since they are savers, they’ll likely pass down quite a bit of cash, so I don’t want the government to get a 50% cut. Plus having proven I am financially responsible, I feel I can be trusted with that money. I would just invest it, and use it to pay for their care in old age should they spend all their savings. Or to restore a family house, or help my siblings.

Receiving a lump sum from your parents should be treated as a privilege, and not an obligation. Even if they give you $500 a month to help with your expenses, you should expect the payments to stop at any time. Be thankful and worthy of their generosity. Use the money to pay off your debt, invest for retirement, or save it to buy a house, send your own kids to college, etc.

As young adults we think we know it all, but our parents can be a great source of wisdom when it comes to saving and investing money. So have a talk with them and ask them what their hopes were when they gave you that gift. Try to save the better part of it, even if you earmark a small percentage for fun money. Parents want us to be happy, but your financial stability will bring them more joy than seeing you jet off to Cancún for spring break.

Giving money to your children or loved ones

Like I mentioned earlier, the checks I got for Christmas sometimes made me regret a time when the person would take time and come up with something nice. Maybe because at times I was just given a check in a white envelope, with no card or anything.

If you are going to give small amounts, there are many ways to make your gift a little more special.

  • You can make a nice envelope to enclose the check.
  • You can write a thoughtful card, that you can also make yourself. Or write something at the back of a picture of the two of you.
  • You can give brand new bills. A crisp $100 bill or a stack of $1 bills to make it look big!
  • You can give a gift card. They make them really pretty, and if the person is a regular at Starbucks, Target, etc. it is the same as cash to them, just nicer looking.

Now if you are giving a five figure check to your children, to help them buy a house or pay for college, or simply to pass wealth and enjoy a tax break, there are a few things to keep in mind. If you just tell your kids it is to “help them get a good start in life”, but do not outline clear expectations, they might not do with your money what you would have hoped they would. And since it was a gift, you can’t really be resentful if they blow it on a brand new convertible.

If you are giving money with a specific purpose in mind, debt pay off, investing, paying for education,… your intentions should be very clear. Some parents choose to match their kid’s 401k contributions to encourage them to save for the future, some pay tuition directly to the college to make sure the full amount goes towards it, etc. Again, your money, your rules.

Giving money to your children is a bit sensitive, as you don’t want them to rely on your generosity forever. But if it is done the right way, it is a great solution to pass on wealth with little or no taxes.