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Creating a Nest-egg for Your Child With Bonds

As a child, I was blessed with many relatives who realized that my future was more important than the present. Every holiday, many of my relatives would give me a small amount of cash, and also a certificate for a bond. To a child, the bonds were entirely useless– after all, they wouldn’t even be worth the price on the front for many years. As an adult, I’ve realized that bonds were an essential foundation of a nest egg which I was eventually extremely grateful for in a pinch. Let’s look at some of the properties of bonds that make them a good way to invest in your child.

Money in your pocket today is all well and good, but it’s too liquid– too easy to use and lose. In an emergency, the first thing that you will turn to is the money in your bank account, and rightfully so– dollars are, by definition, 100% liquid, and can immediately be transformed into whatever goods or assets or services that you need. Bonds are different, however. Bonds can’t be redeemed before the maturity date without a substantial loss of value, meaning that they’re longer term investments that you will be unwilling to exit before their time has come. This fact means that bonds typically aren’t factored into your gross savings, because they’re not money that you actually have access to for the purpose of financial transactions.

In return for this inaccessibility, you get an interest rate that is much higher than the interest rate of your bank, or wallet. Whereas savings accounts accrue interest at a rate that is typically less than the rate of inflation, losing value over time, bonds typically have the rate of inflation factored into their appreciation rate, meaning that bonds will continue to gain value even when your liquid dollars are losing value. Thus, bonds are somewhat insulated against macro level economic hardships such as recessions and minor depressions. Extreme economic events such as hyperinflation or hyperdeflation will still alter the value of bonds substantially, but nearly everyone else will be in the same boat.

Bonds are secure. Bonds are typically taken out from the government, who is a reliable debtor, and will be able to repay you for the purchase of the bond, when the bond matures. This fact means that bonds are unlikely to be rendered inaccessible to you, as other securities such as stocks might.

Creating a nest egg for your child using bonds is incredibly easy, and will probably give your child two times the returns as the amount of money that you spend. The easiest way to produce this nest egg for your child is to start today at a reasonable level, and maintain that level for a long amount of time. Child’s birthday? Give him a $50 bond and put it in the safe deposit box; it’ll only cost you $25, and years later, it will be worth even more than $50. Just be sure to steadily invest in bonds habitually for a long period of time, and suggest to other potential gift-givers to do the same. Come early adulthood, your child will have a substantial amount of money locked in bonds that is mature and ready to go; I spent my bond-earned nest-egg on college classes which I wouldn’t have been able to afford otherwise. The best part? I still have plenty of bonds sitting in the safe deposit box accruing interest, because the habit of purchasing bonds didn’t end when I turned 18. This means that I have a nest-egg that will be ready for me in the future, even after a big withdrawal.