The earlier you start saving, the more you usually get out of it. It can therefore be worthwhile to invest money for small children, which you can then give to them later as a financial booster. Grandparents who want to do something good for their grandchildren can also get parents involved.
The good news: Investing for children is not complicated. The financial experts at Stiftung Warentest basically only recommend two simple forms of savings: stock ETFs or fixed-term deposits. According to “Finanztest”, parents and grandparents can safely ignore all other investment products from banks that are sometimes opaque and unnecessarily expensive.
ETFs are exchange-traded index funds that track the development of the stock market at low costs. Prices can fluctuate in the short term, but the return prospects are good in the long term. ETFs are therefore particularly suitable for long-term investments from ten years onwards – a perspective that is available when saving for young people. Finanztest recommends global ETFs, for example on the MSCI World.
The charming thing about it: ETF savings plans can be used to save even small amounts. If you put 50 euros into a global ETF every month, you can turn 10,800 euros into 19,141 euros within 18 years, Finanztest calculates. An average annual return of 6 percent would be necessary, which is absolutely realistic from a historical perspective. In the past 20 years, the annual average return was around 9 percent. If you start with a certain amount of starting capital or pay higher savings rates, you can easily end up with tens of thousands of euros by the time your child comes of age.
To save for an ETF, all you need is a securities account at a bank. There are basically two options: Either you set up the account in your own name or in the name of the child. If the deposit is in the hands of the parents, they retain full control and can decide when to give the money to their offspring. In this case, capital gains are offset against the parents’ tax allowances.
If the parents set up a deposit in the child’s name, the money no longer belongs to them, but to the child. The parents manage it until they come of age, then the offspring can use it. The tax advantage: In this case, profits are not offset against the parents’ savings allowance, but the child can use their own. If there are more than 15,000 euros in the deposit, this would be counted towards the student loan, writes “Finanztest”. In its current issue, the magazine lists some free or low-cost depots for minors.
Thanks to increased interest rates, fixed-term deposits are once again a worthwhile form of savings. The return is usually lower than on the stock market, but the money is absolutely safe and is not subject to price fluctuations. According to “Finanztest”, fixed-term deposits are suitable, for example, if parents or grandparents want to safely invest a large sum in one go. You have to determine the term at the beginning – for example five years. The interest rate is fixed for this period and you cannot access the money.
Here, too, you can either choose a normal fixed-term deposit offer in your own name or open an account in the name of your offspring. The best fixed-term deposit offers for minors currently offer 4 percent interest per year for a term of five years. “Finanztest” only recommends banks from countries with very good credit ratings and correspondingly solid deposit protection. The real return is of course reduced by inflation.
Because the financial testers’ recommendation for ETFs and/or fixed-term deposits is so clear, the experts also consider so-called robo-advisors to be unnecessary. These programs provide automated investment recommendations or implement them directly. According to “Finanztest”, when investing money for children, they only cause unnecessary costs that cannot be recouped through a higher return.
You can read the complete “financial test” article here for a fee
