Financial investment for children: building up assets for the next generation

Financial investment for children: How to build up assets for your offspring

Parents and grandparents want the offspring to start their own lives without financial worries. With the right investment for children, this is not a problem even in times of low interest rates. Whether stocks, ETF savings plans or robo-advisors – we tell you how to find the best investment for children and what you need to consider when building wealth for children.

Investing for children – the most important things in brief

Investment for children – recommendations & Tips

Start building wealth now

According to the Federal Statistical Office, a child costs up to 130,000 euros up to the age of 18. However, the biggest expenses then usually only come from parents and grandparents or the fledgling offspring: driving license, own car, first apartment, training or study place fee, a longer stay abroad.

Anyone who wants to financially pave the way for their child to start their own life should start building wealth for the offspring at an early age. The best way to invest money for children is the stock exchange, because: Neither a savings account nor a classic savings book offer interest that justifies an investment. Inflation means that the loss of purchasing power tends to make the money less than more.

Savings accounts – more on that later – can at most be a supplement to a stock market investment. There is no alternative, especially with a long-term investment horizon: Where with a short-term exposure to stocks, ETFs & Co. Losses due to market downturns outweigh the opportunities in the long term. In the past, volatile stock market phases and bear markets (downturns) have been balanced out over an investment period of 15 years or more.

Financial investment for children on their own or with professionals

With Exchange Traded Funds (ETFs for short), you can easily participate in the developments on the stock exchange: ETFs track an index, for example the German leading index DAX, as closely as possible. Over the past 15 years, the DAX has achieved an average return of eight percent, so a DAX ETF has also achieved an eight percent return (less fees).

Coupled with a savings plan, ETFs are perfect for long-term wealth accumulation and investment for children. For many private investors, however, it is a challenge to select the right ETFs for your savings plan and to keep an eye on costs, tax effects and the performance of the investment portfolio. But choosing the right ETF can be decisive for the success of your investment.

Digital asset managers, also known as robo-advisors, relieve you as an investor of exactly this challenge. Robo-Advisor select the best ETFs for your investment strategy and create them fully automatically for you. OSKAR For example, your capital invests worldwide, adjusts the portfolio if necessary and makes optimal use of tax advantages – this is why robo-advisors in general and OSKAR in particular are ideal for investing in children.

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The best opportunity-risk ratio on the stock exchange

A stock market investment offers the best risk-reward ratio for long-term asset accumulation. While you only receive 0.5 to 1.5 percent interest on your invested money with a call deposit or fixed deposit account, you can use shares, ETFs or certificates to get one Return of ten percent and achieve more.

Of course, in contrast to the classic savings book or overnight deposit and time deposit account, stock market investments are not entirely risk-free. Securities are subject to risks. The dangers on the stock exchange include the general market risk, i.e. changes in the political or economic environment, which also affects the prices of securities.

DAX with strong performance despite crises

With long investment horizons, these downturns or bear markets hardly play a role, they have been balanced out repeatedly in the past: The German Stock Institute (DAI) has calculated in a study that the leading German index DAX has returned an average of 8 over the past 50 years, Achieved 3 percent – despite the October crash in 1989, the dot-com bubble in 2000, the financial crisis in 2008 and other (smaller) market corrections (you can find a graphic overview of this in the DAI’s DAX yield triangle).

Important: Securities offer protection against inflation and a significantly higher return than any other form of investment. A really good investment for children should offer this chance of a high return.

Note: For a stock exchange investment, you first only need a securities account, which is best opened with a cheap online broker. You can find out how this works and what you should pay attention to in our online article Open Online Depot.

High return, high risk: individual shares

Investors who want to invest money for their children or grandchildren in individual shares should already have some experience with stock market investments. Although individual shares are the first choice with regard to yield opportunities, they are only of limited use for the accumulation of assets for young people, because: shares are often subject to large fluctuations.

As an investor, you should be aware of the opportunities and risks. When investing in stocks, you have to deal with your investment all the time, which can be tedious over a period of ten years or more.

Note the issuer risk for certificates

Since there is an abundance of certificates on the market, you should know your investment objective before choosing the right certificate and therefore compare different certificates with each other. Also take a look at the cost and keep in mind that certificates are bearer bonds.

One risk that investors bear in bearer bonds is the issuer risk. In the event of the issuer’s bankruptcy, it is possible that part or all of your capital may be lost. If you want to buy certificates to build wealth, you should therefore research the business and financial situation of the issuer before making a purchase.

Tip: In a well-diversified portfolio, certain individual stocks or index certificates, for example, can take on the role of accelerating returns. In our advice articles on stock exchange trading and introducing certificates trading you will learn more about the advantages and disadvantages of investment products in general as well as certificates in particular.

ETFs ideal for investing in children

A really good investment for children should offer a good risk-return profile when building long-term wealth. With the right investment product, bear markets (downturns) on the stock market can easily be weathered. The investment product that can make the most of a long-term horizon is the ETF.

ETFs (exchange-traded funds), i.e. exchange-traded index funds, are not only flexible, transparent and inexpensive, they are also ideal for investors who want to actively invest in children. ETFs are among the cheapest investment products at all, are particularly transparent and offer an excellent risk-return profile, especially for investing in children.

In our ETF Fund guide articles, for example in What are ETFs ?, Buying ETFs, MSCI World-, we explain in detail what you should pay attention to as an investor when choosing an ETF, what costs play a role and how ETFs work. ETF and ETF savings plan. We have explained the most important terms relating to ETFs and funds in the ETF lexicon.

Inexpensive and profitable: ETF savings plans

ETFs track a stock market index, ideally 1: 1. A DAX ETF, for example, reflects the development of the leading German index, while a Dow Jones ETF reflects the development of the leading US index. In contrast to actively managed funds, which aim to outperform their benchmark through constant restructuring, index funds passively replicate their benchmark – As a result, ETFs also perform no worse than the market.

With an investment in the world stock index MSCI World, you as an investor would have made 10,000 euros over 15,000 euros in the past ten years, with an investment in the leading German index DAX it would have turned into more than 18,000 euros.

In addition, ETFs are among the cheapest stock exchange products at all: the management fees for exchange-traded index funds are generally between 0.15 percent and 0.50 per year, for classic investment funds they are significantly higher at around 0.80 to 2.50 percent per year.

In conjunction with a savings plan, ETFs are therefore perfect for long-term wealth accumulation and for the investment of children.

With an ETF savings plan, you as an investor regularly invest a certain amount in an ETF, for example every month or quarter. Many banks and online brokers offer savings plans on index funds free of charge and from a minimum investment of EUR 25 per month.

How an ETF works, what you have to consider and how to set up an ETF savings plan, we reveal in the following guide articles: Buy ETF, ETF savings plan and ETF lexicon.

Our recommendation: Set up a savings plan with an ETF on the world stock index MSCI World (more in the guide MSCI World-ETF). You will then spread your capital particularly broadly and with a long-term investment horizon of 10, 15 or more years you have the chance of a small fortune – your children will thank you for it.

With regular savings for small fortunes

Even with small amounts, you can build up a decent fortune for the offspring if you start investing in time. If, for example, you invest half of the child benefit, i.e. around 100 euros per month, through a savings plan and over a period of 18 years with a return of three percent, the result is assets of over 28,000 euros. With a return of five percent and the same savings rate, you can build up almost 35,000 euros.

A large part of the interest gains are tax-free on the child’s tax-free allowance, provided you save for the child. Anyone who does not save in the name of the child loses the tax-free allowance – that costs cash.

It is therefore better to start building wealth on behalf of your child today than tomorrow. Let your money work for you and your offspring on the stock exchange right after the birth of your child – we will provide you with them below most profitable investments for children in front.

Tip: In addition to a stock exchange investment, fixed or overnight accounts can also be used to supplement wealth accumulation. Savings accounts offer a lot of security, especially for short-term investments, and fixed-term deposit accounts also offer relatively attractive interest rates. Some financial institutions have special offers such as child accounts or junior depots – read more about this in our savings guide for children.

Waiting for downturns on the stock exchange – already known?

Bear markets (downturns) on the stock market strain the psyche of investors and, in the short term, prices as well, but generally do not play a major role for long-term investors. With the particularly broad investment horizon of a newborn, such periods can usually be easily overcome if the investment product is right.

Because: The time in which the invested capital is not needed to build up assets for the next generation is usually 15 years or more. This long investment horizon means that the market risk is reduced to a minimum.

Tip: With a cheap ETF savings plan or a digital asset manager, you as parents or grandparents can make the most of this long investment horizon for your children or grandchildren.

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