Investing & saving for children 2022: the best alternatives

When children grow up, they need a lot of money pretty quickly. Parents are therefore acting with foresight if they begin as early as possible to set aside some capital for their offspring for the start of their own lives. The following article provides information on recommended investment strategies. We give tips and present the best alternatives to investing and saving for children.

  • All legal representatives of the child must give their consent
  • A copy of the child's birth certificate is required for the opening application
  • ETF savings plans with a long term are particularly suitable as an investment for children
  • The basic fees for the Junior securities account should not exceed ten euros
  • The earlier you start saving the better for the child
  • Only index-based equity funds are fully recommendable
  • If securities trading, then do not just bet on one horse but spread the risk

You can find our recommendation in the area of stock portfolios for children here: Junior Depot Comparison

Investment for children: 5 alternatives

In the past, investing money for children was delightfully simple. You simply opened a savings account in the child's name. Friends and relatives could pay money into these funds at any time, which automatically increased thanks to lavish guaranteed interest rates. This is long gone, because since 2008, the ECB's key interest rate fell from once over four percent to now almost zero percent. Alternatives to the savings account for children are thus in demand.

  1. Investment in ETFs and funds: fund savings is a good investment option and the earlier it is started, the better. ETFs with the longest possible term of ten years or more are particularly recommended.
  2. Savings account / passbook: This form of investment is currently not recommended, because investors lose money with it. Interest rates there have already been below 0.1 percent for years, well below the rate of inflation.
  3. Investing in individual shares: Shares carry considerable risks, especially as investment objects, because the price development of a share is simply unpredictable. If shares are to be used as a savings model, then it is best to focus on stock-solid companies, such as those from the S&P500.
  4. Building savings contracts: A building savings contract yields practically no interest, but you get a very low-interest loan after the savings phase. Therefore, it is only worthwhile if you plan to use the home savings loan to finance a property later on.
  5. Piggy bank: inflation is currently over seven percent (as of May 2022). Accordingly, the purchasing power of money also decreases. So if you just put existing money into the piggy bank, you automatically become a little poorer every day.
  6. Fixed-term deposit: For safety-conscious investors, fixed-term deposits can still be an alternative. Depending on the investment horizon, the interest rates are higher than those of a savings account. More info here: Fixed deposits for children

ETF investment for children: How index funds work

ETFs (Exchange Traded Funds) are inexpensive and require almost no administrative effort. In addition, they spread the risk, are therefore considered low-risk and are highly valued by financial experts as a solid form of investment.

ETFs are exchange-traded index funds, d.h. each ETF contains securities of several companies and their composition corresponds to the respective ETF index.

There are passive and active ETF. Passive ones follow their index closely, active ones are managed. Both types of ETFs are traded almost exclusively on XETRA, a trading platform of Deutsche Börse AG.

Saving for children

Open a securities account for children: Recommended providers

A recommended securities account charges hardly any, and ideally no, basic fees, excludes high-risk forms of investment from trading and does not charge more than ten euros for setting up a savings plan.

The more ETF and share and fund savings plans the Kinder-Depot offers, the better. Interest savings offers, on the other hand, tend to belong to the "nice to have" category due to the subterranean interest rates. In the following, we present recommended options for investing and saving money for children.

Consorsbank Kinderdepot

Parents can choose between funds, ETFs and shares for their children's securities account. Both one-time and regular savings deposits are possible – the latter starting at ten euros per month. The savings rates can be adjusted and also interrupted at any time. Custody account management, 370 ETF savings plans and 130 fund savings plans are free of charge. All other ETFs as well as the 580 share savings plans cost 1.5% fees.

Comdirect share deposit for children

ING Junior Deposit

ING advertises its Junior Depot with free custody account management, fee-free ETF savings plans and savings plans starting at a savings rate of one euro. High-risk asset classes such as leveraged products or certificates are completely excluded from trading. At ING Direktbank, the securities account can be managed conveniently via the web or an app.

  1. Both parents agree to the opening
  2. The online application is completed
  3. The contract documents are sent by mail and are signed and returned
  4. You receive the access data and can immediately buy ETFs and shares for your child

Investment and savings in the name of the child or in their own name?

If funds are saved for the children, then this should also be done in their registered name. On the one hand, this prevents premature withdrawal and misappropriation, since the legal guardians cannot access this money.

In addition, it can be advantageous from a tax point of view: if the legal guardians save in their own name, they also have to pay tax on the resulting investment income themselves. On the other hand, all such income from a child's account belongs to the child alone and is therefore tax-deductible up to an amount of 10.581 euros (as of 2021) exempt from tax.

Compound interest: The eighth wonder of the world

When interest income is reinvested, thereby also generating interest, this is referred to as compound interest. The financial world also calls this form of income generation self-financing or (profit) retention.

If, for example, one decides to reinvest in an ETF, the ETF operator immediately buys back all distributed earnings. d.h. further ETF shares without further consultation with the shareholder. The additional income thus generated leads to an accelerated increase in capital without any further action on the part of the investor.

Inflation and loss of value hits even the smallest ones

Due to Corona and especially the Ukraine war, inflation has skyrocketed in recent months. In April 2022, it was 7.4 percent in Germany, and just above that in the euro zone.

This means that in this country – compared to the same month last year – all products and services have increased in price by this percentage on average. Unfortunately, this mainly affects existentially important daily necessities such as food or energy.

Inflation hits especially hard those who have to turn over every cent twice anyway.

Building savings contract, education insurance & child protection bond

With regard to the valuation of building savings contracts, nothing fundamental has actually changed since they came into existence. Due to the low interest rates, it is still not worthwhile to invest and save money. However, it makes sense to use the low-interest building society loans that are then available to finance a property.

However, only in conjunction with a Riester contract can deposits on home savings contracts be tax deductible. Training insurance and child protection certificates are less recommendable. Both are too inflexible, their costs are too high and their returns too low.

Sustainable and long-term thinking

Sensible saving for children requires perspective thinking. After all, it can take up to 18 years until the offspring is of age and thus has access to the money invested in his name. Financial products with a long investment horizon are therefore recommended.

In contrast to self-directed securities trading, long-term, index-based funds offer a solid return – and without the need for parents to intervene or worry. Investments with a term of at least ten years, such as ETF savings plans, are therefore recommended

What Stiftung Warentest recommends

According to Stiftung Wartentest, investing and saving for children is worthwhile for many parents for tax reasons alone. Fund savings are particularly recommended as a form of investment for children, with their long terms, broad risk diversification, low fees and low administrative costs.

This applies in particular to ETF savings plans, as the fees and risks are generally particularly low here. Stock funds offer better return opportunities, but also involve a higher risk and are therefore only recommended to a limited extent.

Influence of savings credit on BAföG

According to §§ 26-30 BAföG, trainees and students must first use their own assets to finance their education before they can make a BAföG claim. However, there is an allowance here. This is for singles without children at 8.200 euros.

It increases for married trainees or trainees living in a registered partnership by 2.300 Euro. The tax-free amount for each child the trainee has is also increased by exactly this amount. (as of 2022) LINK TO OFFICIAL WEBSITE

Frequently asked questions – FAQ

Since the topic of investing and saving for children is extremely complex, many questions arise accordingly. The competent tips from Stiftung Wartentest on investing and saving money, which it has published on its test site under the title "FAQ Sparen für Kinder – was Eltern wissen sollten" (FAQ on saving for children – what parents should know), are particularly recommended.

What is the best way to invest money for my children??

It is advisable to set up a children's custody account or a children's savings account. Parents, relatives and family friends can transfer money to these plans at any time, either once or by standing order.

All donors can be sure that their money will benefit the child alone, and only when the child has reached the age of majority. The legal guardians manage the account until then, but can not withdraw money.

How much money should I save for a child?

This depends on the financial strength as well as the future plans. An important role in investing money for children is when to start saving. The sooner this is done, the less one has to pay in to ultimately get to the desired amount.

Anyone who invests about 25 euros a month in an ETF savings plan can expect to earn about 3,500 euros after ten years – according to the calculation of Stiftung Warentest's free ETF savings plan calculator. More info here: Savings rate for children

Which investment is still worthwhile?

Which investment for children is worthwhile? Time deposits, whether as overnight money or for several years, are currently not worthwhile. However, this could change soon, as interest rates seem to be gradually rising after long years of drought.

So fixed-term deposits could well be an alternative again in one or two years' time. Until the time comes, solid, long-term funds are recommended as a safe form of investment, ideally index-based to minimize risk.

You can also open a time deposit account for children there.

What form of savings for children?

Responsible parents do not take any risks with their children. This principle should also apply when saving for children. All risky investments are therefore taboo, in particular trading in options and warrants, derivatives, leveraged products and cryptos. Fixed-term deposits are safe, but hardly yield any returns.

Solid fund and ETF savings plans with a term of at least ten years promise higher returns.

Form of savings for children

Advice from Debeka, Sparkasse, Volksbank, HUK, Union Investiment useful?

All the financial service providers mentioned in the title have been active in the market for many years and have earned a good reputation as reputable companies. A consultation with them is therefore generally useful. Of course one should consider thereby however that each enterprise wants to sell its products and the advisor lives perhaps even from commissions.

In addition, the quality of advice also depends on the expertise of the respective advisor. Therefore, it is always wise to seek advice from several financial companies before making an investment decision.

Do children have a savings allowance?

Yes, regardless of age, every person in Germany has in principle a savings allowance. In the course of the introduction of the flat-rate withholding tax, this savings allowance was merged with the lump-sum advertising allowance in 2009 and has since been called the savers' lump-sum allowance (Sec. 20 IX EStG). The background to this is that capital gains tax is payable on all investment income, such as savings interest, dividends or profits from the sale of securities.

However, thanks to the savers' lump sum, a certain amount is exempt from tax when determining income from capital assets. Currently, this amount, for which no capital gains tax is payable, is 801 euros per person, i.e. 1602 euros for two parents. (as of 5/2022) All investment income above this amount is generally and uniformly taxed at 25%. In addition, there is the solidarity surcharge of currently 5.5 percent and, if applicable, a tax credit. the church tax. But beware: this only applies to private individuals; in the case of commercially generated investment income, the tax regulations are considerably more complicated.

In any case, any parent or legal guardian whose capital income exceeds the said 801 euros can use children's accounts to exempt a further part of their capital income from taxation. For this purpose, this capital income only has to be earned on the child's account, and the child's lump-sum savings amount can already be claimed. But of course the money then also belongs to the child. D.h. the parents are only allowed to manage it, but not to dispose of it. This money is only released when the child has reached the age of majority. With his 18.After the child's 60th birthday, the child receives full and sole power of disposal over the children's account, including all funds and securities held there.

Save for your children despite Hartz4, is that possible??

For Hartz4 recipients, strict legal limits apply with regard to their assets. The exemption limit is currently 150 euros per year of life, but at least 3 euros per year.100 euros, whereby this sum also applies to minors (as of 2022). All assets that exceed this exemption limit are offset against Hartz 4 benefits.

Hartz 4 recipients who want to invest money for their children should therefore take these exemption limits into account. This means that if the existing parental assets exceed the exemption limit, it would be wise to transfer this partial amount to the children in order to exhaust their exemption amounts in this way. In addition it is necessary that one transfers this money demonstrably and explicitly to them. The best way to do this is to set up a children's account or a children's custody account.

It is not enough to save the money "for" the children, it must be invested in the name of the child, i.e. it must officially belong to the child. Only then this money is deducted up to the exemption limit of 3.100 euros not counted against parents' Hartz4 benefits. But of course this money then also belongs to the child, which means that the parents are then only allowed to manage it, but neither withdraw it nor transfer it to their own account. And the child itself also only comes to it when it is of age.

What is the non-assessment certificate??

A non-assessment certificate is a confirmation from the tax office that a natural person (i.e. not a company) is not assessed for tax purposes. The non-assessment certificate is therefore aimed at people whose expected income is below the basic tax-free threshold, such as pensioners, students and low-income earners.

With such a certificate, they are not assessed for income tax and therefore do not have to file an income tax return. You can easily obtain the non-assessment certificate from the relevant tax office, it is valid for three years. If the financial circumstances of the holder of such a certificate improve to such an extent that he or she is likely to become liable for income tax, he or she must inform the tax office of this, return the certificate and file an income tax return in its place. (§ 44a EStG)

The non-assessment certificate is also important for financial investments. It can be used to avoid that the investor's bank automatically pays the capital gains tax to the tax office in case of capital gains. Anyone who has such a non-assessment certificate and submits it to their bank does not have to submit an exemption order to the bank. Thanks to this certificate, investors receive their investment income without any tax deduction – even if the investment income exceeds the lump-sum savings amount. In contrast to a normal exemption order, the amount of tax-free income is not subject to any limit in the case of a non-assessment certificate.

Can parents dispose of the children's assets?

No! Parents may only hold the child's assets in trust within the scope of their custody rights. However, you may not spend it under any circumstances, i.e. neither for your own purposes, nor for other things such as maintenance or even to finance or increase the standard of living. If the parents violate this, the children can reclaim the money by suing for damages.

Parents also have the duty, within the scope of their custody rights, not only to preserve the assets of their children, but even to increase them. Violations are considered a breach of their duty to maintain assets in trust. For this reason, the children are entitled to compensation, for example, even if the money was used to finance the jointly used apartment.

As the Higher Regional Court of Celle ruled (Ref. 21 UF 89/17), this prohibition to spend the child's money applies to the parents even if the underage child should have given his or her express consent to do so – since he or she is not yet legally capable. In the case at hand, parents had used the child's money, with the child's consent, to finance a driver's license.

This was unlawful, the judges ruled, and ordered the parents to reimburse the child for the entire cost of the driver's license, including interest, from their own assets. Only when the child reaches the age of majority is he or she allowed to decide what happens to the money invested in his or her name; before that, it is taboo for the child himself or herself and also for the parents.

The only exception to this statutory regulation is earmarked donations. If, for example, the grandparents give the child money with the condition that he or she will use it to obtain a driver's license, the parents may also spend the money for exactly this purpose.

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