When the first child benefit and the first gifts of money from relatives for the offspring flutter in at young parents, they often ask themselves: What do I do with it now? Of course, this perspective is privileged. Those who earn little may need child benefit to make ends meet with their family. After all, children cost a lot of money: according to the Federal Statistical Office, couples spend an average of 763 euros a month on their offspring.
But it doesn’t matter whether it’s a small amount of 25 euros a month or the entire child benefit: It’s always worth starting to save early and regularly for your children. Children have a big advantage when it comes to investing: They have time. They therefore benefit particularly from the compound interest effect. So if, ideally, parents start saving right at birth, the investment horizon is 18 years until they come of age.
But what is the best way to invest the money? Accumulating it in a savings account at the bank like previous generations did is a risk-free investment option. After all, banks are courting young customers with special, fee-free children’s accounts. In the meantime, the financial institutions are again offering interest on fixed-term and call money accounts. However, these are still low. An investment in the stock market therefore continues to offer better opportunities for returns. The fluctuations in value on the stock market can be sat out well over the long investment period.
Parents can invest particularly inexpensively and broadly in an ETF on the world stock market, for example on the MSCI World. This invests in 1650 companies from 23 countries worldwide. Other broadly diversified indices from established providers are the MSCI All Country World Index and the FTSE All World Index. The MSCI All Country World Index tracks the performance of 2900 companies from 47 countries worldwide – in contrast to the MSCI World including emerging markets such as China, Brazil and India. The FTSE All Country World invests in 3900 companies from 49 countries.
Thanks to a savings plan, a good cushion can be created for the driver’s license, studies and the like for the next generation over the years. With the help of the return calculator of the consumer advice centers, investors can calculate individually what return prospects they can expect.
A calculation example: If someone invests in a savings plan on the MSCI World every month for 20 years, they can save the following amounts with an assumed return of around five percent per year and assumed costs of 0.5 percent per year (inflation and taxes are not taken into account):
investment per month
invested amount
Investment income
Total capital after 20 years
100 Euro
24.000 Euro
that. 25,300 euros
rd. 49.300 Euro
250 Euro
60.000 Euro
that. 63,200 Euros
rd. 123.200 Euro
The examples show: It pays to keep at it, because with a steady investment, the invested capital can more than double.
In addition to the question of “how” when investing for children, the question in whose name the money should be invested also plays an important role. Opening a securities account in your child’s name has a number of advantages. First of all, parents can save taxes in this way: just like adults, children are entitled to an allowance of 1,000 euros in tax-free profits per year, the so-called savings allowance. If the income exceeds this 1000 euros, there is another trick: With the help of an application for a non-assessment certificate at the tax office, parents can also claim the basic annual allowance of 10,908 euros for the child.
Another advantage of investing in the child’s name is of a didactic nature: precisely because there is still a lack of financial education in Germany, parents can introduce children to investing in this way. In this way, they can teach their children how to handle money responsibly at an early age and, for example, encourage them to save some of their pocket money. A regular look at the portfolio together can also sensitize young up-and-coming savers to the fluctuations on the stock exchanges.
But this also has a downside: the custody account is managed by the parents, but the money in it legally belongs to the child. When they turn 18, they get full access to it and can do whatever they want with it. Many 18-year-olds will certainly use it responsibly. Others, on the other hand, would rather finance an expensive trip around the world or buy a car than go to university when they are 18 – and the parents who are responsible for maintenance are at a disadvantage. At the same time, the depot could even cost the child his Bafög entitlement: Anyone who exceeds the upper asset limit of 15,000 euros loses here. The wealth of the parents plays no role, only the income.
So when parents save the money in their own name, they are making sure it is being spent for its intended purpose. Should they ever find themselves in financial distress, they also have an additional cushion that they can fall back on in the worst case. Nevertheless, opening a custody account in the child’s name and saving small amounts together with the child cannot do any harm: because early practice pays off.
This article first appeared here in the business magazine “Capital”.
