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 grandparents want. The youngsters should be able 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 junior deposit, savings plan or time deposit – we tell you how best to save money for children and which child’s investment is really worthwhile.
Saving for children – the most important thing in brief
Saving for children – recommendations & Tips
Saving for children – there are options
Children are our future. And children are expensive: from diapers and baby porridge to the first cell phone to school and driving license. A child up to the age of 18 costs a total of 130,000 euros, the Federal Statistical Office has calculated. Anyone who wants to financially pave the way for their child to start their own life should set aside money early for training and studying their children – better today than tomorrow.
A savings account or the classic savings book earn almost no interest. And due to inflation, the money in the bank account becomes even less over the years – so modern wealth building has to go different ways. Above all, saving for children can be worthwhile with a savings plan or a securities investment; fixed or overnight accounts can be an alternative or a supplement. Sometimes banks and savings banks also offer child accounts or so-called junior depots, which (should) offer particularly favorable conditions for young people. In the following we took a close look at the various options and found the best options for investing in your children – this is the only way to make savings really useful for children.
Stay away from protective letters
A child’s smile can conquer the world. Parents, grandparents and godparents therefore do (almost) everything for the offspring – also financially. The banks who advertise with a mouse account, a baby savings book or a Maya the Bee letter of protection know this.
But be careful: Not all offers bring the financial success that they promise. And some offers are not really useful for your youngsters to build wealth, may they be dressed in words so loving.
Insurance companies, for example, which are supposed to secure the education of your child "are not suitable for saving for children". This is the verdict of Stiftung Warentest in “Finanztest” edition 12/2017. Child protection letters, which are supposed to protect against risks like accident, illness or school incapacity, are “inflexible, connected with high costs and often without any return”, according to the destructive judgment of the financial testers.
A home savings contract is also not a particularly profitable investment for young people, the savings interest is usually even lower than with other interest investments. And: The prospect of a cheap building loan is of little value in view of record low building rates. Only state grants or discounts from the building societies, which can thus be secured for the next generation, make the "provision" in a building society contract even more sensible.
Saving for children is best "in the name of the children"
However, wealth creation on behalf of children should offer more: flexibility, transparency and of course the chance of a higher return. Investments made in the name of the child are much more suitable than training insurance or a home savings contract. Parents and grandparents have the choice between secure (and low-yielding) current accounts and / or savings accounts, one-time investments (e.g. fixed deposits) and ETF savings plans that are a little more promising.
Whichever investment you choose, the investment should ideally be completed in the name of the child. The account is then a child account, the deposit is a junior deposit. This has some advantages, for example tax.
Tax-free income limit for children
There are tax benefits if you complete the investment in the child’s name. In this way, you can spread investment income over several shoulders within the family: Normally, each child (and each adult) can use a saver lump sum of 801 euros per year. There is then no tax on this amount per adult and per child. A family of four creates a saver lump sum of 3,204 euros.
Completing the investment in the name of the child brings yet another tax benefit: Income on savings accounts and children’s deposits also remains tax-free up to the amount of the tax-free allowance (€ 9,168) and the special expenses lump sum (€ 36). The total tax-free income limit for children is in 2019, therefore, 10.005 euros, in 2020 even 10.245 euros.
If your child is the owner of the securities account, then all capital gains from the accumulation of assets up to the amount of the tax-free income limit will be retained. By the way, nothing changes in the child benefit entitlement. The child benefit is only canceled if the child works more than 20 hours a week and thus generates his own income.
With a so-called NV certificate from the tax office, you can ensure the tax-free income limit. This also saves you the annual effort of an exemption order. There are also no costs for a tax consultant, if he would take over the service – further down in this article you will find more information about the NV certificate.
The money belongs to the offspring
If the savings account or the securities account is closed in the name of the child, there is another advantage: the temptation of the parents or grandparents to use the money already saved in an emergency for their own purposes.
To conclude the investment in the name of the child means that parents (or grandparents) manage the investment for the little ones until they reach the age of majority, legally, however, the money belongs exclusively to the children.
With their 18th birthday, the children can do what they want with the money. So that the youngsters do not squander the money saved over many years, this is Transfer of the “assets” to a payment plan shortly before the age of majority makes sense. The money is then paid out in monthly installments. The parents (or grandparents) can flexibly set the rates in advance.
Tip: In our guide to investing in children, we compared various options for investing in children.
Junior Depots: Saving in the name of the child
For tax reasons, it is worthwhile to invest money in the child’s name. Even if the account or deposit is opened and managed by the parents, the money legally belongs to the child alone. The parents’ power of attorney expires as soon as the child is of legal age.
Parents are allowed to manage the account or custody account, but are generally not allowed to withdraw money. If the parents do this nevertheless, the child could sue his parents (purely theoretically) for the repayment of the money.
Important: Children can only be included in the parents’ health insurance free of charge as long as their capital gains do not exceed EUR 425 a month.
And more importantly, children lose the right to educational support (Bafög) if their assets exceed EUR 7,500. If parents or grandparents have saved a lot of money for the offspring, the chance of state support could be lost.
Save for kids with ETFs and OSKAR
As already mentioned, ETFs are perfect for long-term wealth accumulation and savings for children. They are particularly cheap, flexible and transparent. In connection with a savings plan, there is hardly a more promising capital investment with a long investment horizon of ten or more years.
Parents and grandparents who do not want to deal personally with the ETF selection, a suitable securities or ETF savings plan portfolio and tax issues when building wealth should take a look at OSKAR toss. This investment product was developed exclusively for stock market investment for children – saving for children is literally “child’s play”.
From an amount of 25 euros per month you can invest money for yourself and your family. The capital you invest is managed professionally and invested in the best ETFs. If necessary, you can get your money at any time, so your capital is not inaccessible for a certain period of time, as with a time deposit.
Best of all, you can follow all developments in your securities account or in your securities accounts using a modern app. OSKAR also costs a maximum of one percent of your assets each year, there is no front-end load, no performance fees and no hidden costs.
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Fixed-term deposits – solid asset accumulation
For parents or grandparents who regularly save a certain amount of money for their offspring and do not want to take any risk, a call money account with good interest rates is perfect. A minimum deposit is not necessary and smaller monetary gifts can be easily invested at any time – this is the easiest way for children to save.
Unfortunately, not all banks offer overnight accounts for minors. In addition, the interest rates for "daily mouse money accounts" are often lower than for overnight money accounts for adult customers.
Tip: overnight accounts are particularly interesting for savers with a short-term investment horizon. The investor takes little risk and remains flexible because the money can be withdrawn at any time. If there is less than five years until the driver’s license exam or until the start of the apprenticeship, a call money account is the right investment for the youngsters.
It is even better if you switch the money to a time deposit account at regular intervals, for example every two years. Fixed-term deposit accounts offer significantly higher interest rates and are therefore a very good choice for a high one-off investment. However, the money is not available over the term – you just put the money firmly on.
In “Finanztest” (edition 12/2017) Stiftung Warentest asked more than 150 banks about their offers for children and selected the best ones. "The highest interest rates are with direct banks, where the accounts have to be kept online," the financial testers concluded. The “Finanztest” editorial team chose the fixed deposit offer of the winner Eurocity Bank based in Frankfurt am Main. With a term of ten years and an investment of EUR 5,000 or more, the bank offers an annual interest rate of 1.85 percent.
Those who want to invest less "are in good hands with the Cronbank from Dreieich near Frankfurt am Main", it goes on. In the Cronbank there is already 1.40 percent interest per year for the same term from 1,000 euros. According to the "Finanztest", the offers of both banks apply throughout Germany.
Also the Debeka made it into the top 5 in the “Fixed-term deposit accounts for minors” test. With a term of ten years and a minimum deposit of EUR 2,500, the insurance group and building society still offers 1.70 percent per year.
Saving for children with a bank savings plan?
If you want to save regularly for the little ones, you may also consider a bank savings plan. "Bank savings plans are simple and safe," says Annabel Oelmann, financial expert at the Consumer Advice Center North Rhine-Westphalia. You can take out bank savings plans with a fixed term or let them run for an indefinite period and then cancel them after a short lock-up period.
A bank savings plan is low-risk and deposits – even if the bank goes bankrupt – are legally protected up to EUR 100,000. Stiftung Warentest currently advises against bank savings plans for children in “Finanztest” (edition 12/2017) due to the low return prospects.
Tip: A bank savings plan should be as flexible as possible despite long-term orientation and should allow early exit as well as adjusting the monthly rate. You can find more information in our savings plan guide.
Extra tip: Non-assessment certificate (NV certificate)
A non-assessment certificate (NV certificate) exempts low-income earners or minor children with their own income from capital assets from the flat-rate tax – even beyond the saver’s lump sum.
The NV certificate can be applied for at the responsible tax office and is called "Application for a non-assessment (NV) certificate". There is a separate application form for minors with their own income from capital assets, which must then be filled out by the parents.
The NV certificate should be applied for before the due date of the investment income at the tax office. The completed application must then be submitted to the respective bank.
Security investments: high-yield investments for children
In times of record low interest rates, savers – and thus also parents and grandparents – cannot avoid the stock market. Comdirect attracts with a free “Junior Depot”, ING-Diba promises good return opportunities with the “Direct Depot Junior” and Maxblue, the direct broker of Deutsche Bank, advertises a children’s deposit. All custody accounts for minors are free of charge from direct banks, so there are no account management fees. There are only a few providers who require an active savings plan from the investor so that account management remains free, for example Comdirect and S Broker, the broker of the savings banks.
Exchange-traded index funds (ETFs) are ideal for all parents or grandparents who want to build up a small fortune for the smallest family members over many years and are not afraid of taking risks. At best, ETFs track a stock index 1: 1: if the leading German index DAX rises one percent, then the DAX ETF rises one percent.
ETF savings plans that track global stock indices such as the MSCI World or the MSCI All Country World have historically generated returns of between six and eight percent annually. There is no guarantee that this trend will continue, but with a long investment period of ten years or more, a comparable return is very likely – an ETF savings plan on the MSCI World forms a good basis for a "Junior Depot". We’ll tell you more in the MSCI World-ETF and DAX-ETF guides.
Tip: Some direct banks offer a selection of ETF savings plans at very good conditions, for example www.finanzen-broker.net: There you not only get a securities account free of charge, for over 160 ETF savings plans you pay for just one euro per execution.
By the way: Stiftung Warentest recommends ETF savings plans for investing in children – and provides a sample calculation in “Finanztest” (12/2017). It says: "If you start an ETF savings plan at birth, after 18 years you will get a handsome € 21,165 at a savings rate of 50 euros per month and an assumed return of 7 percent a year." Do you want more about ETF savings plans? Experienced? Then we recommend our ETF savings plan guide.
Important: Money that must be available in less than five to ten years should not be invested in shares. If parents and grandparents start saving too late, so the time for the offspring to come of age is five years or less, then investing in shares could be too risky.
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