Before You Buy Another Toy, Turn ‘Gift Money’ Into a Future Win for the Kid in Your Life

If you’re scrambling for a last-minute holiday gift, don’t overlook one of the most powerful options out there: an investment.

Yes, material items bring joy, but money that’s invested instead of spent can do something a toy or clothes never could: grow. And, eventually, that money can unlock opportunities like debt-free schooling, a new car, or a down payment for a house.

I know this from experience.

Every year for my birthday and Christmas, my grandfather gave me a $50 savings bond. The fancy paper with its Treasury watermark carried a certain thrill when it slid out of the envelope, but the feeling always gave way to mild disappointment: I couldn’t spend it, and even if I cashed it in, it would be less than the promised $50.

So I handed the bonds to my mom, year after year. She tucked them away, assuring me that one day they’d be worth the full $50—even more.

That day came when I was a sophomore in high school and preparing to study abroad. I cashed in some of the earliest bonds and, for the first time, saw their full value. I went from being broke to having money in my pocket to travel, explore, and say yes to moments I would have otherwise missed.

So if you’re feeling overwhelmed by the clutter, or underwhelmed by another round of wrapping paper, consider this: A small investment can create a future your loved ones will never forget.

What small gifts can become with the power of compounding

An investment carries a connotation of costing thousands or more to have an impact, but a simple $25 to $100 contribution can make a meaningful gift, says Brett Bernstein, CFP, CEO and co-founder of XML Financial Group.

“The power of compounding is amazing,” he says. “The earlier people can save and the more they can save, the more they will have over time.”

So what exactly is compounding? It’s when your money earns returns, and then those returns start earning returns of their own. Over years, those small gains build on one another, turning modest contributions into serious value.

“I always say no saving amount is too small,” he adds. “It’s better to start with something than with nothing.”

And the math backs him up: Let’s say that instead of buying your niece a $50 birthday present and $50 holiday present every year, you invested that money in a basic brokerage account with an average return rate of 6%.

By the time she’s an adult, the account would have almost $3,400, and you’d have spent only $1,800 over 18 years.

It’s an impact that Srbuhi Avetisyan, research and analytics lead at Owner.One, a platform for asset management, has seen in person.

In an analysis of 13,500 households, she found that, “Households in our dataset who invested $25 to $100 per occasion consistently reached five-figure balances by adolescence—even with moderate return assumptions (4% to 6%) and irregular contributions.”

But the payoff wasn’t purely financial.

“Families who invest even small gift amounts for children tend to build stronger long-term financial habits and continuity than families who convert every gift into consumption,” she adds.

It’s an important callout. Choosing future impact over present clutter helps grow mindset as much as net worth. When gifting becomes part of a savings habit instead of a spending cycle, kids start to associate money with goals, not just stuff.

Where to invest gift money and how to choose

But where can you park your investment? According to the experts we spoke to, the best investment vehicle often depends on one simple question: What is this money for?

If the money is for education, use a 529 plan

The 529 plan is purpose-built for future education costs. Contributions grow tax-free and can be withdrawn tax-free for qualified expenses like tuition, books, and even housing.

These plans are especially valuable when education is a known goal, or when multiple relatives want to contribute to the same pot over time. But it does come with a trade-off: You sacrifice flexibility for favorable tax treatment. The money can’t be used for expenses other than education.

If the money is for general future use, use a custodial account

If you're not sure what the money will be used for—college, a car, a wedding, a down payment—custodial investment accounts like Uniform Transfers to Minors Act (UTMAs) or Uniform Gifts to Minors Act (UGMAs) offer more leeway. These accounts allow adults to gift stocks, bonds, cash, and even real estate to minors.

The catch here is that control of the account shifts to the child once they reach the age of majority (typically 18 or 21), and they can use it however they want. For some families, that’s a deal breaker, so it’s worth discussing expectations upfront.

If the child has real earned income, consider a Roth IRA

This one comes with a big asterisk: Roth IRAs for minors work only if the child has actual earned income (think anything with a W-2 or documented 1099).

If they qualify, a Roth IRA is a powerful head start. Contributions (but not earnings) can be withdrawn at any time, and long-term growth is tax-free. But this option is for teens, not toddlers, and it requires documentation—so it might not be the ideal last-minute gift this holiday season.

Keep it simple, and make it stick

Still, not having something to unwrap on a holiday can seem like a letdown. 

But, “parents don't have to choose,” says Andy LaPointe, a financial coach and former registered investment adviser. “They can provide fun and responsibility. Simply split a money gift between current consumption and investing for the future.”

It’s the best of both worlds: Something for the present and the future.

Other risks, rules, and simple guardrails

For all their merits, even small gift investments come with real-world logistics, and while none of the risks should stop you from getting started, it helps to go in with eyes wide open.

The most common pitfall is not understanding the tax baggage that can come with noncash gifts.

“One mistake some people don’t fully understand when they make a gift of noncash is your cost basis carries over to the gift recipient,” says Bernstein. “If you gift them a low-cost basis investment and they sell it, they are the one obligated to pay the taxes.”

Put in simpler terms: If you hand your child a stock that’s gained a lot of value over time, they could owe capital gains taxes down the line.

Another overlooked issue is timing and control. Custodial accounts like UTMA/UGMA legally transfer to the child when they become an adult. Some families are surprised (and sometimes regretful) when that happens.

“Another common issue is unintentionally giving the child full control at the legal age of majority, which many parents regret,” says Avetisyan.

But the third, and most risky, trap is forgetting the account exists.

“The most damaging pattern we observe is a lack of documentation and continuity—parents open accounts, but successors have no idea they exist,” Avetisyan says. That can mean lost tax forms, untracked contributions, or money that sits idle for years.

So what can you do? Avetisyan offers a checklist of simple safeguards that every family should put in place:

• Keep a clear record of every account and contribution
• Decide early who controls the money at different ages
• Avoid overly complex investment choices that create admin headaches
• Make the “future value conversation” part of your family culture

And her last point is an important one: When done right, investing gift money isn’t just about savings, but about teaching intentionality. And that means making the system visible and understandable from an early age.

The case for investment gifts, in a sentence

Investing gift money for kids is ultimately about choosing future impact over present noise, and helping the next generation understand what that means. You don’t need perfection, but you do need a system that’s easy to follow, track, and explain.

“Small, consistent choices—paired with good recordkeeping—tend to outperform both complex products and short-lived gifts,” says Avetisyan.

If you’re still unconvinced, imagine the smile they’ll have when graduating college debt-free or putting a down payment on their first house.

That’s the kind of gift they’ll never outgrow.