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6 holidays gifts that make financial sense

November 14, 2012

| MoneyRates.com Senior Financial Analyst, CFA

If the three wise men arrived in Bethlehem today, would they come bearing gifts -- or gift cards?

After all, somewhere in the last couple millennia, frankincense and myrrh have fallen out of favor as presents. Gold is still popular, but a little heavy to lug around. So, 21st-century versions of the three wise men (which by now would surely include at least one wise woman) might do what so many of their modern-day peers do: fall back on gift cards.

Then again, being wise men, or wise persons, they might skip the gift cards in favor of one of the options below.

Gifts that make financial sense

While perhaps the most convenient, gift cards are far from the most personal way to give value. Here are six gifts that can provide more meaningful forms of enrichment to the recipient -- and in some cases the giver too.

1. A child's first bank account. This would be appropriate for a young, close relative. It is a way of giving money that encourages saving. It can be made more exciting if presented in a way that makes a child feel grown up, and if you emphasize the prospect of more rewards to come in the form of savings account interest.

2. A 529 plan contribution. A 529 plan is an educational savings plan that allows investment earnings to accrue tax-free. Contributions to these plans must ultimately be used for educational purposes by the designated beneficiary. Contributions are also subject to gift tax rules, but that won't be a factor unless you plan on giving someone more than $13,000.

3. A certificate of deposit. In particular, a long-term CD can be a good choice when you want to give a teenager the option of using the money on something other than education, yet you want to discourage them from spending it right away. An added advantage is that long-term CD rates generally exceed standard savings account interest rates.

4. A charitable contribution in someone's name. Giving financial gifts to kids is socially acceptable, but it can get a little tricky when it comes to your peer group. One alternative is to give a charitable contribution in the person's name. This form of gift can be more meaningful if you take the time to find a charity that the recipient likes to support.

(OK, so you want to give something more personal? Gifts 5 and 6 make financial sense for the giver, but also offer a very personal touch.)

5. A communal dinner. This works best in a peer group of friends or co-workers, and can make financial sense for everyone involved. Rather than exchanging gifts you aren't sure people will want, plan a dinner where everyone is responsible for one aspect of the meal. Get together to prepare and eat that meal, and you'll find you've given each other something very valuable: each other's time.

6. Baked goods -- with a twist. Baked goods are a time-honored and cost-effective gift. But rather than giving them at the holidays when everyone is already overloaded with food, consider a twist like making your own "cookie of the month club" through which you give small batches of treats throughout the year.

A final caution on gift cards

Gift cards represent a $100 billion annual business, according to research firm CEB TowerGroup. The popularity is understandable. Gift cards are convenient for the giver, and more useful to the recipient than getting something they don't want. Perhaps the most significant thing gift cards have accomplished is they've made it socially acceptable to essentially give money as a gift no matter the nature of the relationship.

But for all their merits, gift cards are not without flaws. Although the 2009 CARD Act cleaned up some of the most onerous terms imposed upon gift card users, many still charge way too much. Gift cards can charge for buying the card, using the card, and for not using the card. Furthermore, people too often simply fail to use the full value of their cards -- an oversight that cost consumers about $2 billion in 2011 alone, according to CEB.

So if you decide to give a gift card, make sure it carries a minimal amount of fees and a distant expiration date. However, if you really want to resemble one of the wise men or women this holiday season, you'll at least consider the sensible alternatives above.

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