Many parents or grandparents would like to financially for their children or grandchildren. But what forms of investment are there and which is the right one? When it comes to investing money for children, there are initially many unanswered questions that need to be clarified. In this article, we would like to address these questions and show you the appropriate options, because: Investing money for children is an important decision that should be made early on.
First questions Before you decide on a particular form of investment, or perhaps a combination of two or three, you should be clear about what goal you want to pursue with it.
What should be saved on? In what order of magnitude is the savings target?
Should the money be saved at a fixed date or should it be available at any time?
Would you like to invest a larger sum once orsave or invest smaller amounts monthly?
Who should save? You alone or together with family members, godparents, etc.? Should the child be able to help save later on?
You should first get a rough overview of these points so that you can choose the right financial investment for your child, grandchild or godchild.
Investing money for children - What forms of investment are there?
Children's savings book
The children's savings book is probably the classic form of investment. Due to the low interest rates, however, it is not suitable for larger sums of money. However, it is perfect for paying in pocket money or small gifts of money, and every child should have its own savings book. That way, they can learn how to handle money at an early age. Many advisors recommend opening the savings book directly in the child's name. This has the advantage that the money really belongs to the child. Until the child is 18 years old, you receive a power of attorney for the children's savings book and can only dispose of the money if you can prove that the expenditure is used for the child. From a tax point of view, this scenario also has an advantage, as the saved capital does not affect your tax allowance. On the other hand, an existing credit balance could have a negative effect later on if the child wants to apply for BAföG in the future. However, if you open the savings book in your name, there is a risk that you could use the money for yourself in the event of a financial bottleneck. So you would have to weigh that up for yourself.
As far as the return is concerned, the children's savings book can hardly score any plus points. In the long term, the money in the children's savings account will be worth less, as inflation is higher than the interest level. However, it is suitable for short-term savings goals such as a new bicycle or a games console. When the entire savings balance is needed, the savings book must be cancelled at most banks. The notice period is usually 30 days.
Interest income: (0/5) Security: (4/5) Time horizon: Short-term
Daily allowance for children
Overnight money usually pays better interest than the children's savings account, but it does not currently offer a high return. This is also a short-term form of investment and is at most suitable for smaller amounts or gifts of money. Call money is not only suitable for parents or grandparents. Call money can also be suitable if the child wants to save money themselves.
A call money account offers great flexibility, as there is no minimum savings amount or fixed savings plan. In addition, the money is available daily. The deposit guarantee protects the children's call money account against losses and is therefore a very safe form of investment. Interest rates vary from bank to bank, but on average you can currently (as of 2020) expect an interest rate of 0.3% to 1%. You should thoroughly compare the providers before opening a call money account for your child in order to get the best conditions.
Interest income: (1/5) Security: (4/5) Time horizon: Short-term
Fixed deposit for children
Fixed-term deposits should be considered if there is a larger savings goal and the savings amount is to be available at a fixed point in time. Classic examples of this are a driving licence for the 18th birthday or a car. Fixed-term deposits earn significantly more interest than children's savings accounts or call money accounts, but they are tied for a fixed period of time and are therefore not available. The interest increases with the term, i.e. the longer the term, the higher the interest. On average, the interest rate is at least 1.5%, which is below the current inflation rate. With a fixed-term deposit, you usually invest a one-time amount that works for you or your child over the years. It is therefore not suitable for saving smaller amounts on a regular basis.
Interest income: (1/5) Security: (4/5) Time horizon: Medium-term
ETF Savings Plan Child
A sensible long-term investment for children could be fund or ETF savings plans. The interest rate is significantly higher than with the above-mentioned forms of investment.
However, the risk of suffering a loss is also higher. Both funds and ETFs are savings plans that can be set up with a monthly payment of 25 to 50 euros. However, you must always be aware that the development of these savings plans depends on the stock market. This does not always have to be bad. For example, if you have set up a monthly savings rate of 30 euros, then you will purchase shares of stock at that price. If the market is at a low, you buy more shares because the prices are lower. And vice versa. In the long run, the ratio usually balances out, but not always.
With many savings plans it is also possible to make special payments. This is useful, for example, for larger gifts of money, such as a communion present. As a general rule, ETF savings plans are cheaper than funds, as there are no management fees. Setting up an ETF savings plan for children is an attractive alternative to a children's savings book. The required securities account can again be opened directly in the child's name. Grandparents or godparents can also set up a savings plan for their offspring.
On average, a return on equity of 6 to 8 % can be achieved on the stock market. For this, however, you need staying power and must not let yourself be upset by short-term price fluctuations. However, since fund savings or an ETF savings plan for children is basically a long-term affair, you should be able to look forward to an attractive return for your offspring.
Interest income: (3,5/5) Security: (2/5) Time horizon: Long-term
Investing money in real estate is also a medium- to long-term investment that works with a low monthly burden. If you rent out the acquired property, your financial outlay ranges between approx. -50 and + 50 euros. This form of investment is perfect for providing your offspring with a permanent and, above all, attractive income without neglecting the issue of security.
Imagine: Your child turns 18 and starts his or her own life with a paid-off or almost paid-off property. Of course, no other financial investment offers this advantage.
This means that your child will earn a regular rental return and thus start out on a very different footing than others. Most financial investments for children are geared towards the offspring receiving a saved amount at a certain time. However, the child itself hardly learns anything about handling money in this way.
Using real estate as an example, you can teach your offspring about money. Your son or daughter will learn what it means to generate passive income and to become financially independent of your own labour(keyword: hamster wheel).
Either your child will choose to continue to benefit from the monthly rental income or he or she will sell the property at a profit - and at this point (ten-year period) certainly tax-free. Finally, an immense increase in the value of the property can be achieved over the years, which makes a very attractive sales price possible.
If you teach your child about investing early on, he or she could buy a larger property after selling the property and rent it out. After another ten years, this approach could be repeated. Your offspring can become a great real estate investor, investing in several properties and becoming financially free. And this is only because you have made the decision to do something for your child's future and invest a minimal monthly amount.
The return on equity for rented flats is usually 20 to 30% in the beginning.
Interest income: (5/5) Security: (4/5) Time horizon: Medium to long-term
Investment for grandparents - what to look out for?
In order to really do something good for your child, you should pay attention to a few things when investing money for children:
Please always remember that low interest investments are eaten up by inflation. These are fine for the short term, but they are not a long-term solution. And especially when it comes to your child's future, you should plan for the long term.
Regardless of whether the investment for children is real estate or savings plans: A small monthly amount is enough to build up considerable assets in the long term. The important thing is regularity!
Protect your child from itself. What does that mean? We were all once 18 years young and had fluff in our heads. If your child is given full access to his or her bank account or custody account at the age of 18, there is of course always the risk that the savings will be "blown". Against this background, too, a property offers more security than a bank account or custody account.
Profit from the compound interest effect. Albert Einstein described it as the eighth wonder of the world. Why is it so powerful? For example, if you invest 30 euros per month at an interest rate of 5%, after one year you will already have 360 euros plus 18 euros in interest. The saved capital has therefore already increased to 378 euros. The interest increases your savings amount year after year, on which you receive interest again. The following graph illustrates this well.
There are many ways to invest money for children. All forms of investment have their advantages and disadvantages. It is important to us that you act in the child's best interest. So ask yourself: "What is the best and safest long-term investment for my child?