Every kid in the neighborhood will be struggling to stay awake this Christmas Eve, wishing that Santa will deliver a brand new gaming console down the chimney. I can't make any predictions about PlayStation 3 production in Santa's workshop, but I would bet the odds are good that there will be a few stray checks under the tree from grandparents, aunts, and uncles.
In many families, holidays and birthdays become an occasion for small cash gifts to nieces, nephews, and grandchildren. Frankly, can you blame them? How on earth can adults keep up with the constantly changing tastes of teens and tweeners? We can barely keep up with the technology powering their toys.
That means there may be a few $20, $25, or $30 checks in your children's stockings from those well-meaning but befuddled relatives. When the amounts are small, it's tempting to just cash the checks. If you do that, the money will probably quickly disappear into DVDs or iTunes that will be forgotten by the spring thaw.
Resist the temptation to spend those small sums and turn the checks into an opportunity for a little schooling in money. One good financial lesson to begin with is the idea that it doesn't take a lot of money to build big savings over time. Here are some ideas for what to do with those small checks:
One obvious place to start is by establishing a plain old savings account for your child at your local bank. Some banks even have special savings accounts for children. For smaller children, a trip inside the bank can be really impressive, especially since most of their interactions with banking may have involved standing next to you at the ATM machine.
With a savings account, children will probably get their own important mail from the bank. If the savings account pays interest, they can watch their money grow. That's an important monthly lesson that does not require a nagging parent constantly reminding them about the power of compounding interest.
If you want to be more technology savvy, open a savings account at an online bank. You can do that as soon as the children finish setting up the new computer that you got for Christmas.
The big ticket item in your child's future is probably college, and it will cost a boatload by the time you're ready to send your little scholar off to the Ivy League. Those holiday checks may seem small, but every little bit counts.
By adding holiday gifts to an educational savings account, you can start teaching your children about planning for the future and saving for long-term goals. Then share some information about the college savings with your children in a way that's appropriate to their ages. Let them know they'll benefit from the money later, and maybe you'll plant an early seed of scholarship in their little minds.
This is easy if you already have an educational account set up. If you don't, there are several options. You can learn all about them in our College Savings Center. Once you have an account established, it may prove a boon to confused relatives who have no idea what to give your children year after year.
It may seem a little absurd to think about setting your children up for retirement before they've even finished high school, but it's not a bad idea if you have an older child with income from a part-time job. Consider a Roth IRA, which would allow retirement money to grow tax free for many, many years when contributions are made by teens. Learn more about IRAs here.
It takes newly minted college grads a long time, often until their 30s, to realize they had better start saving for retirement. By then, young people have lost the big advantage that can be gained by starting to save in their 20s and letting that money compound longer. By putting your teens on a path toward retirement, you'll harness this power and maybe even encourage them to start their own retirement savings sooner.
If you think you might have a budding capitalist in your brood, use their holiday cash to buy stock in a company. With DRIP investing, you don't need a lot of money to start buying shares of your favorite companies.
Spark your child's interest by choosing a company they'll know and that makes a product the child loves. Companies like McDonald's, Coca-Cola, and Walt Disney are immediately recognizable to most children. All three also allow for the dividend reinvestment plans that allow you to start building a portfolio with small dollars.
Making your kids put all their Christmas cash into savings may turn you into the household Scrooge, so consider having them divide the proceeds among savings, spending, and giving. This introduces the idea that not all money needs to be spent (an idea you can reinforce when they're begging for junk food at the grocery store).
This approach gives them the freedom to spend some cash as they see fit and start making their own money decisions. By also introducing the concept of giving, you can open their eyes to a whole world of charitable donations, where they might learn that a dollar can do a lot more than buy the latest electronics.
For more tips on helping prepare your children -- and yourself! -- for all life's financial needs, check out our personal finance newsletter service, Motley Fool GreenLight. A free trial is yours for the taking. You'll be able to see our current issue, as well as explore our subscriber-only discussion boards.
Disney is a Stock Advisor selection. Coca-Cola is an Inside Value pick.