Investing money for children: the best tips for building wealth
By the time a child reaches the age of 18, they will have cost an average of €160,000. That is why parents and grandparents often want to set aside money for their children and grandchildren so that they can fulfil their future wishes. In the past, savings accounts were the first choice. But nowadays, interest rates are so low that savings accounts are no longer a worthwhile investment. So what are the alternatives for building up assets for children?
In brief:
- Savings accounts, fixed-term deposits and instant access accounts as a way for children to learn how to handle money
- ETFs as a long-term asset accumulation strategy to fulfil future wishes and benefit from returns
- Save on taxes: You should think carefully about whose name your child’s securities account is held in.
Investing money for children: why is it worthwhile?
Young adults in particular often have many wishes that are not easy to fulfil financially. One example is obtaining a driving licence and buying their first car. The costs can vary greatly depending on the number of driving lessons required.
A dream trip or a stay abroad are also often wishes of young people. They want to learn a new language or get to know a new culture. Just as important is providing for your own child during their training or studies. Depending on their life situation, they may have to pay rent, living expenses and study costs. It is difficult to estimate how much money a child actually needs for further education, as this depends heavily on their individual situation and needs.
Good to know:
But one thing is clear: a financial foundation can be a great support for a successful start to adulthood. This makes it all the more important to address the issue of wealth accumulation in advance, in order to give your child an easier start in life and support them in achieving their dreams.
Investment options for children: these are the possibilities
Different types of investment offer different risks and advantages. Often, a combination of different types is advisable. Here is an overview of which investment options are suitable for children and why.
1. Savings account, fixed-term deposit, instant access savings account
Savings accounts and call money accounts are ideal for teaching children how to handle money. Both types of investment are easy to understand, straightforward and carry no risk. Children can check how much money is in their account at any time.
Good to know:
Call money accounts or fixed-term deposit accounts are suitable for short savings periods with a specific goal, if deposits are not to be made for longer than 10 years. One such goal could be financing a driving licence if the child is already 15 years old.
In some circumstances, the rapid availability of money may also play a role. If availability is important to the investor, instant access savings accounts are more suitable. However, the interest rates, which can change daily, are confusing here. If the saved money is not needed for the time being, investments in a fixed-term deposit account are more suitable. The advantage here is that the interest rates are fixed for the specified term and are normally slightly higher than for a call money account.
In principle, both are very secure investments that do not promise high returns. The amount saved will therefore not grow particularly rapidly, as it cannot benefit from compound interest. In such cases, there are alternative investment opportunities on the stock market.
2. ETF savings plan
Equity funds are a suitable example of such an alternative investment opportunity on the stock market. The potential returns here are significantly higher than with savings accounts, instant access accounts or fixed-term deposit accounts. Stocks are the most profitable form of investment for long-term wealth accumulation.
It is important to note the different types of equity funds. ETF savings plans are associated with low costs and very broad risk diversification. The ETF tracks the performance of a stock index.
Attention!
This means that they are also associated with a certain degree of risk. Depending on the economic situation, there may be significant fluctuations in value, which is why investing in ETFs is only recommended if the investor has sufficient time. As a rule, the money should be invested for at least 15 years.
Another advantage besides returns is flexibility. For ETFs, a savings plan can be set up that automatically invests a certain amount each month. This amount can be changed very flexibly and free of charge or paused if necessary.
In summary, ETFs are well suited as investments for a longer investment period of more than ten years. The high level of diversification can also reduce risk. They are a convenient way to invest, as they are a passive investment that does not require daily attention. Once a year, you should perform a so-called rebalancing and readjust the initial structure of the portfolio.
3. Other possibilities
Insurance policies usually also take the form of savings plans and offer special deals for children. However, caution is advised here, as these are usually associated with high fees and administrative costs, which reduce the return. In addition, such investment options are inflexible, as you are normally tied to a fixed term.
Investing in building society savings accounts is also not worthwhile at present. The interest rate on credit balances is just above 0 per cent. Once all the necessary costs have been deducted, it is no longer worthwhile for building society savers to take out a savings agreement. Nevertheless, building society savings accounts are popular because brokers receive a commission.
Investing in the child’s name?
If you open an account or a securities account for your child at a financial institution, you must specify who the investment is registered to. This point is often underestimated, although it can be important, particularly with regard to taxes.
Good to know:
Anyone who saves in their own name must pay tax on the capital gains themselves. If the parents’ tax allowances have already been used up, it may therefore be worthwhile to save in the child’s name. Income from children’s accounts remains tax-free up to €11,184.
However, future implications for statutory health insurance should also be considered. With statutory health insurance, children are usually covered free of charge. The child can remain on the family insurance policy as long as they have no or low income. However, there is an income limit of €485 per month and €5,820 per year. This means that the child can earn €6,820 per year, including the saver’s allowance of €1,000, without losing their place on the family insurance policy – provided they have no other income.
When deciding whose name the account should be in, you should also consider the possible impact on any BAföG application for future studies. In order to be eligible for financial support, it is important that children do not have significant assets, which is why it may sometimes make more sense to use the parents’ name.
Conclusion: Investing money for children – long-term wealth accumulation with ETFs
Basically, it can be said that it can be very practical to start building up assets for your own child at an early stage. Young adults in particular have many wishes that cannot always be fulfilled without financial reserves.
ETFs that offer good returns are suitable as long-term investments. However, anyone wishing to invest in ETFs should also have sufficient time and an investment horizon of at least 10 years in order to minimise risk. ETFs offer another advantage: they can be automatically debited from your account on a monthly basis, with a flexibly adjustable rate that can also be paused if necessary.
Anyone who wants to save money for their child in an ETF should also take the time to consider whose name the securities account will be held in. There are various aspects to consider here, such as BAföG (student loan) or statutory health insurance.
Previously popular forms of investment such as savings accounts or building society savings are no longer worthwhile. Interest rates are now virtually non-existent, and some products incur additional costs that further minimise returns.
FAQ – Frequently asked questions about investing money for children
