Compound interest: The gift that keeps on giving

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What do you get for the kid who wants everything? The teenager who’s too cool for anything? The college student who doesn’t know what to ask for?

Sometimes cash seems like the safest bet. It’s like a gift they get to open twice—first when they receive it, and again when they spend it. But before you stuff a few bills into a Christmas card, or load money onto a gift card, consider the benefits of letting it grow in an interest-earning account instead.

Compound interest can turn your holiday gift into one that truly does keep on giving. Each year, the interest it earns gets added to the principal, which earns even more interest. The longer the money stays put, the more it will grow. Someday, when the recipient withdraws the funds, they’ll get an even bigger gift than the one you originally gave.

Why compound interest makes a great gift

While toys and electronics will eventually break or become obsolete, a savings fund with compounding interest just keeps getting better over time. But that’s not the only reason to give the gift of compound interest. Here are three more:

  1. Nothing teaches kids about the power of saving and investing like watching their own money grow. Your gift could become a catalyst for developing lifelong financial habits.
  2. It’s easier to save when they don’t have to start from scratch. Creating an account for them, or giving their existing account a boost, removes one of the most common barriers to saving: not knowing where to start.
  3. Even a small donation to a savings fund represents an investment in the person’s future. It’s one of the most meaningful gifts you can give.

So how do you go about giving the gift of compound interest?

Donate to a college fund

Contributing to a child’s college fund, whether you’re starting one for them or donating to an existing account, is one of the best ways to give their future a boost. The earlier you start, the longer the money has to grow, which makes it an excellent gift idea for young children. But no matter what age you start or how much you’re able to contribute, every dollar counts.

Start an IRA

For kids who don’t need help with college, another option is to start an individual retirement account – also known as an IRA. An IRA makes a great gift for a high school or college student, giving them an early start on retirement savings and decades to build their nest egg. The sooner they get started, the more freedom they’ll have to enjoy their golden years.

Even if you don’t have a specific purpose in mind, contributing to a child’s savings account (or starting one for them) is a gift that will continue to grow over time.

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