A savings account for the birth? It’s no longer worth it today. Anyone who wants to provide the youngsters with a financial cushion for adult life at an early stage has better options.
The article first appeared on September 15, 2021. We are releasing it for World Savings Day.
In Germany it has a certain tradition that parents or grandparents open an account for children in order to save a little money. When the offspring come of age, so the thought, they should be able to afford a driver’s license, an apprenticeship, or whatever else you need to stand on your own two feet.
However, opening a savings account when the baby is born is no longer really lucrative in view of the zero and negative interest rates. Those who want to do something financially good for their youngsters should rather rely on other means today, advise the experts from “Finanztest”. They looked at different options and made their recommendations.
Too expensive, too inflexible
First of all: The “financial test” experts do not consider everything that banks provide for children to be a good idea. For example, they advise against combination products that not only save money but also protect against risks such as accidents, illness and the child’s disability. Such mixed bags are “inflexible and almost always too expensive,” write the financial testers.
Even with pure junior savings products, the costs are often too high, especially if you rely on actively managed equity funds or other unnecessarily complicated forms of investment. The financial testers recommend two options as solid and sensible savings products for the next generation: fixed-term deposits or stock ETFs.
The fixed-term deposit is the risk-free, but less profitable variant. Anyone who puts a one-off amount – depending on the bank at least 1,000, 2,500 or 5,000 euros – in their account for five to ten years can receive a fixed interest rate of between 0.5 and 1 percent per year from the best providers. That’s not a lot, but it is bombproof. Even if the bank goes bust, the savings are legally protected up to a sum of 100,000 euros.
Equity ETFs ensure returns
Fund savings plans that can be saved with low monthly sums promise higher returns. For this purpose, the financial testers recommend ETFs on a broadly diversified stock index. These passive equity funds are usually inexpensive and are less volatile than individual stocks. Since there can still be short-term price losses, the investment horizon should be at least ten years.
Anyone who starts saving in a global ETF when a baby is born and continues to do so until they reach the age of majority can save a considerable amount of money. In the past, the savings plan return over a period of 18 years averaged 7.8 percent per year, according to the “Finanztest”. Those who set aside 50 euros a month saved 23,000 euros by their 18th birthday. 110 euros per month would have been enough to reach the proud sum of 50,000 euros by the age of majority.
However, you cannot calculate with certainty with these sums – things can go better as well as worse on the stock market. In the worst historical case, the € 50 savings plan would have turned into just € 10,000; in the best case, this investment would have been enough to reach € 50,000 after 18 years, writes “Finanztest”.
Stay flexible with the payout
Those who bet on shares should rather not be limited to their 18th birthday as their payout date because of the possible fluctuations. Because if the prices are then in the basement, it would be a bad moment to close the depot. If possible, it is better to wait for the recovery that follows.
One possibility is also to sell the shares at a stock market high before their 18th birthday in order not to be caught by the crash at an inopportune time. “The best thing to do is to look into the depot a few years in advance in order to plan. If the money is available to start training or study, you can sell the fund shares in good time,” advises the consumer portal “Finanztip”, which is also a good stock ETF Saving option for children recommends. If the money is intended for a later home purchase or even as a pension, the child can, however, keep the deposit as an adult and continue to build up assets.
A fundamental question is whether the account or deposit is opened in the name of the child or the payer. The advantage of child accounts is that their income is tax-free up to a certain amount – currently around 10,000 euros. The child can then freely dispose of the savings amount when they reach their 18th birthday – regardless of what plans the hard-working donors themselves had in mind.
You can find the full article by “Finanztest” including recommended securities accounts and time deposit offers at www.test.de
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