With the Senate passing its bill just over a week ago, it seems next year we will have a new tax law of the land. Speculations runneth over regarding its final form, the consideration of the joint conference committee and both legislative bodies remain before it reaches the President’s desk. A future column will address the tax changes once a law has passed, including the steps you should take to lower your tax bill now and in the years to come.
For now we will address an eminently predictable event: holiday gift giving. It’s true most shoppers do not seek out the advice of their local financial planner (no doubt fearing a humorless reply). Consider a common gift idea to avoid and a less known one to embrace for the people on your list.
Avoid Gift Cards. Most gift giving guides don’t begin with an exhortation of what not to purchase, but this gift is so common that I’ll make an exception. It’s also the source of over a billion wasted dollars per year according to CEB Tower Group. The subject of my ire is the lowly, common store gift card. I get it. You are at a loss for ideas to give someone, you don’t know their size, and they are picky recipients even with your present purchasing prowess.
So you reach for that gift card when you’re in the supermarket because it shows you at least understand what store they like to visit. So what is the problem with them? When you buy a gift card, you are exchanging your hard-earned cash to become an unsecured creditor of a business. You now have an I.O.U. from a corporation that you will pass along to your loved one. True we’re not worrying about companies like Amazon going out of business. But you may possess a Sports Authority gift card that is completely worthless, as there were more than $90 million of gift cards in circulation when it filed for bankruptcy.
Retailers are thrilled when they sell you a gift card. They know at the worst that they have an automatic sale to the gift card holder. At best (for them), the card will be forgotten in the back of desk drawer never to be used. Starbucks recognizes a percentage of its circulated gift cards as income every year because their experience shows that a significant portion will go unredeemed. Plus there are reports that fraudsters in some cases can compromise gift cards before they are loaded if they are publicly accessible like the kiosks in many markets. What should you do instead? Sure it may seem crass, but how about cash tucked in an envelope with an idea of how to spend it?
If you happen to receive a gift card for holidays, you should use it immediately! If you have no interest shopping in that store, you could post the card for sale on a web service. Consumer Reports evaluated the most popular sites two years ago, and found the highest prices paid through Giftcards.com and Cardpool.com. They tend to give you about 80 percent of card’s value back in cash.
Starting Out with Stocks. People often ask me how they can get a member of the younger generation interested in the stock market. When you give a child a stock investment, it can trigger an interest that lasts a lifetime. But it’s hard to find an account with minimum low enough for a reasonable gift. For this reason Charles Schwab is my favorite brokerage firm for small custodian investment accounts. For as little as $100, a young investor can open with a parent a custodial account with access to low cost Schwab brand mutual funds and ETFs with no transaction fees. Plus its web site is well-designed and easy to use for investing novices.
Another option is the more focused Stockpile, which is gifted through purchasing a gift card (we can’t get away from them, can we?) that allows a recipient to purchase one of thousands of stocks including some diversified ETFs, which closely mimic mutual funds. If you wanted to gift $50 for investing, you would pay about $3 above that amount to give the child the ability to purchase stock in a company. Some additional fees apply if you buy the Stockpile gift card with your credit card. There’s no problem if the desired stock price is above the gifted value because all shares are purchased in fractions. After the gift card is used, your new shareholder has the same SIPC fraud protection as accounts with all the big brokerage firms.