Saving for children: How parents properly invest money for children

Image source: © Adobe Stock / Text: Verivox

the essentials in brief

• The money that children save themselves to finance larger purchases is best invested as overnight money.
• When saving for several years to a big goal with a fixed date – such as a moped or a driver’s license – time deposits are the right investment for children and young people.
• Large monetary gifts are best invested by parents in a mix of time deposits and high-yielding investments such as stocks or funds. Cheap index funds (ETFs) are particularly suitable.
• If grandparents, godparents or the parents themselves regularly save money for children, a fund savings plan is particularly suitable.
• Low costs, more returns – pay attention to favorable conditions when choosing your financial products and your securities account.

+++ This guide is updated regularly. The following information corresponds to the current status in October 2019. Subsequent developments have not yet been taken into account +++

Many parents regularly put some money back for their children. Grandparents, aunts and uncles or the godfathers also often contribute to the wealth accumulation of a child with larger monetary gifts. Parents are therefore faced with the question of which investment is particularly suitable for children. Those who pay attention to high interest rates and an attractive return get more out of the money saved. The savings book should have been used as the sole facility. Interest rates there are usually lower than inflation. So the rising prices eat up part of the money. We explain what you should pay attention to when saving for children and how you can introduce your children to responsible use of money.

The right investment depends on three factors

First of all: There is no such thing as an optimal investment for children. How the money is best invested depends on three factors.

1. From the savings target

The money that children save themselves to finance a bicycle, a game console or a computer should be invested differently than very large money gifts, which are used to build wealth and should not be used for short-term consumption requests.

2. From the term of the plant

Is the money saved needed at a certain time? Does it even have to be available at all times? Or should it be invested for a long period of time and generate as high a return as possible? Which investment is right for children depends heavily on how long the money is saved.

3. From the savings frequency

Do you invest a large amount once or do you pay smaller amounts into a savings plan each month? When saving regularly for children, it is important to pay attention to the costs. After all, if several euro fees are deducted from each savings rate, this will have a significant impact on the effective return.

In the video: Investing money with profit – it’s that easy

Smart with V – whether security-oriented or profit-oriented: With the investment tips from the tariff experts from Verivox, everyone can quickly and easily develop a solid investment strategy that best suits their own needs.

Saving for children: 3 typical scenarios

How the money is best invested for children depends heavily on individual influencing factors. Therefore it makes sense to consider different occasions separately from each other. In the following paragraphs we give you investment tips for three particularly typical scenarios:

• Your child saves even for larger consumption requests.
• You want to invest a large amount of money for your child once.
• Parents, grandparents or godparents set up a savings plan for children.

Scenario 1: Your child saves even for big wishes

Regardless of whether it is an expensive mountain bike, a computer or an expensive smartphone: If children want to save for larger consumption requests themselves, the money is best invested in the overnight deposit account. Money gifts for Christmas and a birthday can be paid in here as well as wages for babysitting or mowing the lawn in the neighborhood.

Daily allowance is available at all times so that your child can get their money when they have saved up the required amount. Just like other savings accounts, a call money account is only kept in the credit. So children cannot withdraw more money than they have and incur debts.

Interest rates for overnight money have plummeted in the persistent low interest rate – above all, many branch banks have stopped paying interest at all. But if you compare providers, you can currently find overnight money accounts with an interest rate of up to 0.8 percent. With a daily allowance of 1,000 euros, that would be 8 euros per year. Some banks also offer a special children’s account and give minors savers particularly high interest on their call money.

Our tip: Research daily interest accounts with high interest together with your child. In this way, the next generation learns what to look for in the offers.

Save with fixed deposits on dates that can be dated

Your child will receive slightly higher interest if he saves his savings as a fixed deposit. However, the money is not available during the term. If it is not clear when exactly the money is needed, time deposits are therefore not the optimal form of investment. However, if children save money on a moped for their 16th birthday or for a long-term planned student exchange, a fixed-term deposit can make sense.

The longer savers put their money in the savings account, the higher the interest rate. It is important to compare the providers so that your child can secure the best possible conditions. Top banks currently grant interest of up to 1 percent for 6-month fixed deposits. Fixed-term deposits with a term of 12 months bring a peak of 1.4 percent, 2-year fixed deposits pay interest at up to 1.5 percent.

2nd scenario: invest a large amount of money

Children are often given money for special occasions such as baptism, first communion or consecration to young people. In our scenario, the grandparents give their grandchild 10,000 euros directly at birth. The parents should invest the money in the long term so that it is available to the grandchildren after they reach the age of majority.

Invested as overnight or fixed deposits, the money is protected by the statutory deposit insurance, but it brings little interest. Safe savings accounts alone are therefore not the best investment. Inflation can hardly be offset even with top offers. Equities offer the chance of higher returns. But stock prices are subject to considerable fluctuations. In theory, price losses are also possible. A solid investment for children should therefore consist of two building blocks – a safety and a return building. How strongly the two building blocks are weighted depends on the personal risk profile.

Three model portfolios

The security module

The easiest way to form the security module is with time deposits. In the persistent low interest rate phase, however, you should not commit yourself too long. If interest rates should rise again in the future, it would be a shame if too much of the money would remain tied up in a low-yield investment for years to come. On the other hand, fixed-term deposits with longer terms also result in higher interest rates.

Our tip: Form the security module from two alternately expiring 2-year fixed-term deposits. So on the one hand you collect the comparatively high interest of a fairly long-term investment; on the other hand, one of them expires every year, so that if you reinvest the money, you may benefit from increased interest rates.

The yield building block

In the long run, stocks promise a significantly higher return than fixed deposits. They therefore form the building block of returns. To reduce the risk of price losses, there are a few basic rules to consider when investing in stocks:

Rule 1 – invest long term

In the short term, stock prices can fluctuate massively. In the past, however, the stock markets have always been able to compensate for the worst slumps. Anyone who has invested in the 30 standard stocks of the DAX and has held their investment for at least 15 years has never had to accept losses. Historically, the average annual return over an 18-year investment period was an impressive 8.7 percent. This is based on calculations by the German stock institute.

Rule 2 – buy funds instead of individual stocks

Never put everything on one card when investing in children. So don’t just invest in a single stock, but in funds that spread capital across a variety of different financial stocks. Exchange-traded index funds – so-called ETFs – are particularly recommended. They replicate the price development of large stock indices such as the DAX or the MSCI World one to one. With an ETF on the DAX, you automatically spread capital over the 30 largest German stock corporations.

Oliver Maier

Managing Director Verivox Finanzvergleich GmbH

Most actively managed funds lag behind their benchmark. Passively managed index funds (ETFs) are also cheaper and therefore often the better choice.

Rule 3: Pay attention to the costs

All costs are at the expense of the return. You should take this into account when choosing your financial products. Annual fees of 2 percent of the market value are not uncommon for equity funds. The money is used to finance distribution costs and fund management, among other things. Because an ETF does not need active management, but simply replicates its index, it usually manages with a fraction of these costs.

At the same time, numerous studies show that hardly any actively managed fund manages to outperform its benchmark in the long run. An ETF therefore offers at least as high a chance of return.

The second important cost factor is the securities account. You have to pay fees for the deposit at almost all branch banks. Many direct banks and online brokers offer free custody accounts. The order fees incurred when buying and selling your funds and ETFs are usually much cheaper here.

How much money does the child have after 18 years?

How much money is available to young people in our scenario when they reach the age of majority depends on several factors – including how interest rates and the stock market will develop in the future; not least also of which investment strategy the parents chose to save their child.

At the moment, 2-year fixed deposits bring 1.5 percent interest. For our sample calculation, we assume that the security module constantly generates these returns over the entire term. For the ETF in the yield module, we expect an annual value increase of 6.6 percent – the average annual return of an 18-year DAX system. Under these conditions, depending on the investment strategy chosen, the child would have between € 17,700 and € 27,000 assets at his or her adulthood – an impressive sum for the start into adult life.

What will become of 10,000 euros in 18 years??

3. Scenario: Set up a savings plan for children

Often, however, parents and relatives do not want to invest a large amount once, but instead regularly invest smaller amounts. Then there is a savings plan. A fund savings plan, for example, can be saved with many deposit providers with savings rates starting at 25 euros.

But be careful: if order fees are deducted before each security purchase, a considerable part of the money does not end up in the child’s fund assets, but at the bank. Some custody account providers completely waive order fees for certain ETF savings plans. It is therefore worthwhile to look specifically for a portfolio with discounted ETF savings plans when choosing a provider.

Implement investment strategies in the savings plan

Depending on personal risk tolerance, the three investment strategies can also be implemented in a savings plan for children. With a balanced strategy and a total savings rate of 50 euros per month, you can either invest 25 euros per month in an ETF savings plan and set aside 25 more as overnight money – once a year, the savings are then redistributed from there into a fixed-interest fixed deposit. Or you can alternately put the full 50 euros into the ETF savings plan and the overnight deposit account each month. If your custody account does not offer free ETF savings plans, the alternating rhythm has the advantage that transaction costs are less frequent.

Who owns the money?

Even if the parents manage their child’s money up to the age of majority: it still belongs exclusively to the offspring, provided the account runs in his name. The legal guardians decide how it will be set up, but may not use it for their own purposes. As soon as the child turns 18, they can then have the full amount saved.

If you are concerned that the youngsters at 18 may not be mature enough and simply squander the nice fortune, you can put the money into a payout schedule in good time. Then the child receives a fixed sum of 18 every month. Whether and under what conditions your adult child can cancel the payment plan depends on the individual contract conditions.

Advantages and disadvantages of saving in your own name

Of course, parents and relatives can also invest and save the money in their own name. Then they decide for themselves when the right time has come to leave the child entirely or in part. From a tax perspective, however, it can be advantageous to save in the name of the child right from the start. Because minors also have a personal allowance of currently 801 euros. You do not have to pay taxes on interest and returns up to this amount.

On the other hand, saving in the name of the child can reduce his or her BAföG entitlement. Trainees and students are only eligible if they have less than 7,500 euros. Assets that exceed this allowance must first be used in full to finance their training before they are entitled to BAföG payments.

More guides on the subject

Start credit comparison now

We guarantee: A credit request has been made to Verivox does not affect your Schufa score.

To make you an offer, banks make a Schufa query. But it is only a "Request credit terms". It is noted at Schufa for 12 months, but it is not visible to anyone – neither for other banks nor for third parties. The note will not taken into account when calculating your Schufa score. So you can easily get several loan offers and compare them.

• Top interest rates with over 35% savings

Non-binding, free of charge and Schufa neutral

Related Posts

• 

  Investing money for children: the top 5 ways to save

  Investing money for children: the top 5 ways to save Do you want to invest money for your children? Excellent! The best options Invest money for your…

• 

  Saving for children: the best tips for building wealth for children

  Saving for children: The best tips and tricks for wealth creation for children Investing money for the future of children – that’s what parents and…

• 

  Saving for children: there are these possibilities

  Saving for children, grandchildren or godchildren Saving for your loved ones is important Children cost money, whether day care center, school, stay…

• 

  Invest money for children: savings book or shares?

  Invest money for children: savings book or shares? Parents usually start looking for investment opportunities for their offspring after the birth of…