Investing money for the future of the children – that’s what all parents and grandparents want. The offspring should be able to start their own life without financial worries. With the right investment for children, this is no problem even in times of low interest rates. In the following article we explain which products are really worthwhile and where parents should stay away from them.
Raising a child is nice, but it also costs a lot of money. If the offspring is to receive a decent allowance for their driver’s license or support for their studies on their 18th birthday, savings are the order of the day. But how much money do you spend on it? Which forms of investment are suitable? A savings account or the classic savings account earn almost no interest. And because of inflation, the money in the bank account is getting less and less over the years. Other paths must therefore be taken for modern asset accumulation.
If the child is still small and the savings period is still long until they get their driver’s license, training or a stay abroad, then we believe that the fund savings plan is most worthwhile. Equity funds or ETFs offer the best return opportunities, even if the price fluctuations cause the current value of the investment to fluctuate. But exchange rate fluctuations can also be sat out over the years. Anyone who can save for more than eight years takes a fund or ETF savings plan. For this purpose, some banks offer so-called junior custody accounts, which offer particularly favorable conditions for the next generation.
It is also advisable to use the child’s name for the securities account for tax reasons. Even if the account or deposit is opened and managed by the parents, the money legally belongs to the child alone.
The tax advantages in this constellation include tax-free investment income. For example, each person can take advantage of a savings lump sum of 801 euros per year. There are then no taxes on this amount. For example, a family of five (2 adults and 3 children) creates a lump sum for savers totaling 4,005 euros per year.
When investing capital in the name of the child, there is another tax advantage: In addition, income from savings accounts and children’s custody accounts remains tax-free up to the amount of the basic tax allowance (9,168 euros) and the special expenses lump sum.
Nevertheless, limits must also be observed here so that there are no problems with other branches of insurance. Children can only be insured with their parents’ health insurance free of charge as long as their income from capital assets does not exceed 425 euros per month.
It should also be noted that children can lose their entitlement to educational support (Bafög) if their assets exceed EUR 7,500.
It is therefore advisable to make a precise plan for the child’s wealth accumulation. We are happy to help you independently.
Call money or savings account
The money is flexibly available at any time on the call money account or savings account. It is therefore particularly suitable for short terms. However, we do not recommend this investment for long-term savings plans due to the low interest rates. Many banks offer special free child accounts, but that doesn’t change the poor interest rates. We do not recommend this method of saving if you plan to save for 3-4 years or more for your children’s savings goals.
Training insurance is a capital-forming life insurance policy. At a specified payment date, for example at the beginning of the child’s 20th year, the agreed amount plus possible surpluses will be paid out. Instead of a one-off lump-sum payment, a payment in monthly installments can be agreed, for example at the start of training for a certain period of time.
However, since endowment life insurances entail high costs and generally generate a low return, such an education insurance can quickly turn into negative business. We strongly advise against the conclusion here. This savings product is too expensive and too opaque.
For parents or grandparents who regularly save a certain amount of money for their offspring and do not want to take any risks, a fixed-term deposit account can offer an option, but with regard to the current interest conditions (as of 12.2020) in our eyes rather unsuitable for long-term savings.
For really conservative savers, time deposit accounts offer slightly higher interest rates than overnight money and can therefore be a better choice than a call money account or savings book even for a one-off investment. However, the money is then not available over the term because it is firmly invested.
In summary, it can be said that a really sensible investment can only be realized with a fund savings plan. If you want to give your child the money in 2-3 years, you could alternatively work with a fixed-term deposit or a daily deposit account. Education insurance is, in our eyes, legal fraud and completely unsuitable for this purpose
If you would like more information or would like to take advantage of our advice, please do not hesitate to contact us.