Accumulating Wealth for the Next Generation: Strategies for Amassing a Substantial Fortune for Your Offspring
Saving for a child's future is an important financial decision that requires careful consideration. Two popular investment options are Exchange-Traded Funds (ETFs) and fixed-term deposits. Let's explore the benefits and drawbacks of each.
ETFs for Children's Savings
An MSCI World ETF is an investment option worth considering for saving for children. With an average annual return of 8% since 1975, ETFs offer the potential for significant growth over the long term. To save 50,000 €, for instance, you would need an ETF savings plan on the MSCI World of 106.64 €.
One-time investment over 18 years can significantly increase the total amount saved for a child. Saving for a move or first own apartment, education or studies, or even a stay abroad can be achieved with an ETF savings plan.
ETFs allow investment across a broad range of underlying assets, spreading risk and potentially increasing returns. Investment fees on ETFs are typically low, meaning more of the money grows for the child over time.
Saving in the child's name can provide tax advantages of up to approximately 3,450 € per year. The maximum utilization of allowances for the child with time and fixed-term deposits and with securities in a junior account can be approximately 523,000 € before taxes apply.
However, there are disadvantages such as restricted access, the child can squander the money, complex account opening, impact on BAföG, income threshold of family insurance, and impact on the child's basic income.
Fixed-Term Deposits for Children's Savings
Fixed-term deposits, also called time deposits, offer principal protection and a fixed interest rate, which is safe but usually lower than what equity investments like ETFs can deliver over the long run, especially when adjusted for inflation. The tradeoff is lower risk but also lower growth.
These deposits are a good choice for short-term savings goals like saving for a driver's license or a car, where the time until the expense is relatively short. For long-term goals such as a child’s future education or adulthood, ETFs may provide greater long-term growth potential.
In summary, while fixed-term deposits are safer and guarantee returns, ETFs generally provide greater long-term growth potential and diversification benefits for children’s savings when used thoughtfully, especially in tax-efficient accounts.
It is advisable to consult a financial professional to tailor the strategy based on investment horizon, risk tolerance, tax impacts, and financial goals.
Sources:
- ETF benefits for child investing with low fees and diversification
- Practical example of long-term ETF returns for child savings at ~6% annualized after tax
- Tax and financial aid considerations for 529 plans vs brokerage accounts
- General investment guidance for kids’ accounts, favoring ETFs and index funds over individual stocks for diversification and growth
- Educational insurances or actively managed stock funds, which are often recommended for securing children or building wealth, are often expensive and inefficient. It's especially cost-effective, as scientific studies confirm, to build wealth with exchange-traded index funds.
- Saving for education or studies: To save for education or studies, it's recommended to start investing as early as possible, preferably with a monthly savings plan in a globally investing index fund.
- When saving for a child's stay abroad, it's important to consider tax advantages for capital gains, exemption from gift tax, impact on basic income in a need community, bonuses from the bank, and the complexity of account opening.
- Compound interest effect: The compound interest effect means that you'll need to save much less money because your money will work for you.
- ETF savings plan: An ETF savings plan for children can be set up easily by opening a depot and setting up an automatic savings plan on a world ETF.
- Saving for a driver's license or a car: To save for a driver's license or a car, you can either invest in a fixed-term deposit or an ETF, depending on the time until the expense and your preferred investment strategy.
- Children's account: A children's account is another investment option, often offered by banks to attract solvent parents and their children as future customers. However, savings are only well-remunerated up to a low maximum amount.
- Fixed-term deposit: A fixed-term deposit is a safe investment option for children with good interest rates, but the money is not accessible before the term ends.
- Some brokers or banks attract customers with starting credits, bonus actions, or rewards that they pay out upon account opening or with a certain use of the children's deposit. For example, finanzen.net ZERO offers 10 € per month and Trade Republic offers a 100 € ETF bonus.
- Heike Kevenhörster: Starting a savings plan for a child can build a cushion for future expenses like a driver's license, foreign exchange stay, or studies.
- Savings plan: A savings plan can be started with as little as 1 €, but becomes more worthwhile at 20 or 50 € per month.
- If saving for a child's stay abroad, world ETFs are suitable if you still have at least 15 years to invest. Consider the MSCI World or the more comprehensive MSCI ACWI indices. If the child wants to travel in a few years, opt for fixed-term deposits or bonds to avoid volatile markets.
- When saving for children, it's worth deciding early whether to save in the child's name or your own name. Via your tax return and a betterment check, it is then possible to reclaim the capital gains tax paid too much.
When exploring personal-finance options for a child's future, one might consider Exchange-Traded Funds (ETFs) due to their potential for significant long-term growth, as shown by an average annual return of 8% since 1975 with an MSCI World ETF. On the other hand, fixed-term deposits offer principal protection and a fixed interest rate, which might be more suitable for short-term savings goals such as a driver's license or a car, but may not deliver the same growth potential over the long term as ETFs. Thus, thoughtful investment, often aided by education-and-self-development, is crucial in making informed decisions for a child's financial future.
