Nobody can do for little children what grandparents can do. Grandparents sort of sprinkle stardust over the lives of little children. – Alex Haley, author of Roots
It might be true that grandparents sprinkle stardust over the lives of their grandchildren but grandparents are richly rewarded in return. I had always heard how great it was to be a grandparent but I still wasn’t prepared for how much fun it is.
We have one grandchild, an active boy named Ashton (we call him Bee-baw and he calls me Pee-paw) who will turn 3 years old just before Christmas, and he has brought an unbelievable amount of joy into our lives.
Our Grandson Ashton (Bee-Baw)
We are not alone in loving the role of grandparent. Financial author Jonathan Clements wrote:
I used to dream of spending summers in Copenhagen and winters in San Diego. The birth of my first grandchild taught me that if she lived in Cleveland, I just might move there.
Columnist Doug Larson added:
The idea that no one is perfect is a view most commonly held by people with no grandchildren.
Growing older is not always easy, but it does have its rewards. Mary H. Waldrip stated:
Grandchildren are God’s way of compensating us for growing old.
A Welsh proverb sums up the affection grandparents feel for grandchildren:
Perfect love sometimes doesn’t come until the first grandchild.
This special relationship between grandparents and grandchildren leads to the often truthful accusation of grandparents spoiling grandchildren, something you might be able to get away with when they are small but want to avoid as they get older. So what is a grandparent to do who wants to help their grandchildren financially without spoiling them? Here are few great ideas:
Clear Plans with Parents
The first rule for helping grandchildren financially is to clear your plans with the parents first. Although you love your grandchildren dearly you need to remember that you are not their parents. Respect the role of the parents as primary providers and decision makers in the lives of your grandchildren and coordinate your efforts with them. Failure to do so will strain the relationship with your child and son/daughter-in-law and make additional help difficult.
Establish a Grandparent’s Bank
In my recent post The 10 Smartest Things Ever Said about Teaching Children How to Make Wise Financial Decisions I wrote about establishing a family bank. Grandparents can also establish a bank either in place of or as a supplement to a family bank started by parents.
The primary role of a grandparent bank is to teach children how to delay gratification by paying a very generous interest rate on savings. You should probably pay at least 1% per month and you might want to pay much more than that when they are young. The idea is to establish the habit of saving in children while they are young. In addition to paying very generous interest rates on savings a grandparent’s bank can serve other purposes as I discuss below.
Matching Grandparent Grants
I read about matching grandparent grants in Richard Eyre’s excellent book, Being a Proactive Grandfather. The idea is to help grandchildren save for big-ticket items by matching whatever they can save on their own.
The matching grants will usually be used to help grandchildren purchase experiences such as registration fees for sports participation, music lessons, dance classes, art workshops, summer camps, school trips, and service or mission trips. It could also be used to help purchase items like sports equipment, musical instruments, a computer, or a phone. As with all other financial assistance, clear the idea with the parents first.
In order to get the matching grant the grandchild has to write a grant proposal explaining what it is they are saving for and what benefits it will provide for them. Give them an opportunity to present the grant proposal to you and then make a decision on whether you will award a matching grant and what level of assistance you will provide. The matching grant program can be run as part of the grandparent’s bank.
I absolutely love the idea of matching grandparent grants. It helps your grandkids experience the world and develop their talents in ways that might not be possible otherwise, but it does so in a way that demands initiative and active participation on their part. I also think they will learn a lot through the process of writing grant proposals and presenting them to you. Matching grants are a fantastic way to assist grandchildren without spoiling them. I am excited to start this program with Bee-baw when he gets a little older.
Roth IRA Matches
When your grandchildren get older, and get real jobs, consider an IRA matching program. Help them open a Roth IRA and match any money they contribute to it. The total that can be contributed to a Roth IRA can’t exceed earned income and is subject to IRS limits ($5,500 in 2018). The idea is to get them excited about investing when they are young, teach them how to do it, and get them in the habit of regular saving and investing for the future.
If you are able, be generous with your matches. Based on how much they earn you might even consider matching the grandchild’s contributions with 2 or 3 dollars for every one they contribute. Make the deal sweet enough to get them excited about saving and investing. Matching IRA grants can also be part of the grandparent’s bank.
It is also important to teach them the power of compounding. Matching IRA grants are a great opportunity to this by showing them how much the money they invest when they are young will grow over time. The graphic below, from the Winter 2018 edition of On Investing, a magazine published by Charles Schwab, shows how much contributions to a Roth IRA when a grandchild is in his or her twenties will be worth when they turn 60.
As the graph shows, if you help them contribute the maximum of $5,500 when they are 22 years old it will grow to over $53,000 by the time they turn 60. If you keep this going until they turn 29, helping them contribute $5,500 each year, and then never invest again, the account will be worth over $334,000 when they turn 60. If they have jobs when they are teenagers, and you start even younger, the results would be even more impressive. Matching IRA grants when grandchildren are young are a great way to teach them how to invest and to turn a relatively small amount of financial assistance into enough money to really help them.
Assistance With Education
If you are financially able helping grandkids save for college is a great way to help them financially without spoiling them. The best way to do this is through a 529 Plan which offers tax free growth and no federal taxes upon withdrawal as long as the money is used for education. In most cases grandparents can contribute to a 529 plan set up by the parents, but in rare cases you might need to open a 529 plan in your name with your grandchild as the beneficiary.
Just as important as helping grandchildren financially with their education is teaching them to love learning. Read to them, take them to museums, historical sites, and cultural events, and encourage them to develop their talents. Finally, set an example of lifelong learning by being curious about the world around you and always learning new things yourself. Teach them by example that learning is exciting and rewarding.
In conclusion, Grandparents love to help grandchildren any way they can and they are often in a position to offer at least some financial assistance. This needs to be done in ways that respect the role of parents, teaches your grandchild how to be smart with money, and doesn’t spoil grandchildren or lead to an attitude of entitlement.
The four ideas presented here accomplish all these goals and you don’t have to be a millionaire to implement them. Hopefully you have learned an idea or two that you can use to help your favorite little people as they grow. As for me, in two or three years I will be opening up The First National Bank of Pee-Paw. I can hardly wait.