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Savings plan for children: This is how you can provide for your child with ETFs

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Cost of driving license or studying. Those who start making provisions for their child / he early will have fewer costs in the future. You can read here what a savings plan provides for children and how you can best proceed.

  • Savings book or other contractual forms of savings are no longer attractive. Investing in securities promises a high return.
  • ETF savings plans are interesting without start-up capital and a long-term investment horizon. The broadly diversified passive funds are inexpensive (TER: 0.1% - 0.6% p.a.) form an index and thus generate a broad diversification across many different companies, depending on the index. This can keep the risk low.
  • With ETF savings plans, an average profit of 8% per year can be expected.
  • Good ETFs for a children's savings plan are e.g. iShares MSCI ACWI UCITS ETF (Acc) (ISIN: IE00B6R52259), iShares Core MSCI World UCITS ETF USD (Acc) (ISIN: IE00B4L5Y983).Below in the text you will find further recommendations from me.
  • You need a deposit for an ETF savings plan. It is important to decide whether the deposit should be in your name or in the name of your child. Here you can read the advantages & disadvantages.

Note: The price slump caused by the coronavirus is now a good chance to start with savings plans or increase the savings rate! Read here what you should do with your ETF savings plan & whether investing in stocks makes sense.

Why an investment in securities such as funds, ETFs or stocks for my child?

In the past, savings books, time deposit accounts or building society contracts were the best ways to invest your money. Today the interest rate is very low. If you want to receive fixed interest, you can't get more than 2% per year with classic contracts - that just balances out inflation.

An investment in securities such as stocks or ETFs promises a long-term return of around 8% annually with a comparatively low risk.

And fear not ... Investing in stock trading is very easy. All you need is a deposit at a bank. The best providers are free and you pay almost no fees.

Share prices fluctuate in their course. However, it has been proven that the world economy will grow in the long term. So if you invest in the global economy and invest over a long investment horizon, the risk of losing your money is very low. You can find the theoretical ulterior motive in my stock exchange for beginners post.

Why a savings plan at all?

With a savings plan (also known as a securities savings plan), you buy shares in a share, fund or ETF at regular intervals. The interval can be chosen monthly, quarterly, semi-annually or annually, depending on the depository provider. In the interval, money is invested via a previously determined savings rate. This is possible, for example, from € 25 with a comdirect savings plan or with a robo advisor here: growney savings plan.

The advantage of a securities savings plan is that over the long term, wealth increases continuously and market timing is eliminated. In the long term, no fund manager has been able to reliably beat the market and “time” the market. With regular purchases in weddings and lows, the Cost average effect, an average price arises. This significantly reduces the risk of losing your money. You also benefit from the Compound interest effectwhich, especially after many years, will make your money grow exponentially.

Note: A savings plan on securities is interesting for people who want to save money on a regular basis and who do not have high reserves themselves. If you can already invest a large amount of money for your child (let's say € 5,000 or € 10,000) at once, then a one-time investment in a broadly diversified ETF is better. But if you continue to pay a savings plan on the one-off investment, you will be able to make even more profits in the long term.

Which savings plan for children? ETF savings plans are the first choice

OK. You want to invest in securities for your child through a savings plan - great!

Overall, you have the choice between different savings plans. There are stock savings plans, fund savings plans, ETF savings plans, bank savings plans or a Bitcoin / cryptocurrency savings plan.

Of all of them, an ETF is the cheapest and safest way to invest your money. An ETF maps an index and tries to map the performance one-to-one. With an ETF on the MSCI World Index, you invest e.g. B. in approx. 1,600 companies from the 23 largest industrial countries. The MSCI World Index is regularly re-determined according to certain criteria. Companies that meet the criteria get in, others are thrown out of the index - free rebalancing.

Since an ETF only maps passively, the costs are low. An ETF gets by with 0.1% to 0.6% management costs per year (a normal fund likes 3% - 5% per year).

With an ETF you can easily create a broad diversification and thus protect yourself against a total loss, because the risk should not be too high, especially with a savings plan for children.

Best savings plan for children: ETF recommendations

Since you want to invest long-term for your child, broadly diversified ETFs are worthwhile (also for your own long-term ETF retirement provision, by the way).

Since this is not about distributions either, but rather the growth of the investment, I would like to take this here Name 5 accumulating, i.e. reinvesting ETFswhich I consider as good for a savings plan for children. These ETFs also coincide with my recommendations for the best ETF for savings plans.

  • Shares worldwide, all countries:
    iShares MSCI ACWI UCITS ETF (Acc) ISIN: IE00B6R52259
  • Companies from 23 industrialized countries:
    iShares Core MSCI World UCITS ETF USD (Acc) ISIN: IE00B4L5Y983
  • Emerging Market Companies:
    Xtrackers MSCI Emerging Markets UCITS ETF ISIN: IE00BTJRMP35
  • 500 best US companies:
    iShares Core S&P 500 UCITS ETF USD (Acc) ISIN: IE00B5BMR087

In summary: A rule when investing in ETFs is not to use multiple ETFs that invest in the same markets. Because of this, I would recommend a savings plan on either iShares MSCI ACWI to choose or a mix of iShares Core MSCI World and Xtrackers MSCI Ermerging Markets. If you have a little more trust in the USA, you can S&P 500 ETF vote and overweight the US.

And by the way: In this Trade Republic savings plan article, I am giving you monthly updates on my savings plan on the S&P 500 ETF mentioned above.

Investing money for the child in their own name or in the name of the child?

From a tax and legal point of view, it makes a big difference whether the deposit is kept in your name or that of your child. By and large, it depends on how you trust your child financially, what the intended use should be in the future and how much the sum of money actually is.

Investing money on behalf of the childInvestment in the name of the parents
  • Wealth belongs entirely to the child.
  • From a tax point of view, a child also has tax exemptions. Income up to € 9,837 is also tax-free if the child has no other income (basic allowance, saver lump sum and special expenses lump sum)
  • The money can be made available to the child at any time as you choose.
  • At some banks, the child can be named as a beneficiary who covers the legal aspects.
  • Only the child's assets count for the BAFöG office and not the parents' assets. If the money is not paid out during the course, the child can receive BAFöG.
  • Income from capital assets from € 5,220 annually can mean that the child is no longer allowed to be covered by family insurance.
  • With assets over € 7,500, no BAFöG is likely to be paid.
  • When the child reaches the age of 18, they can freely dispose of the money.
  • Profits are deducted from your tax credit. If you've invested money yourself, you may be paying taxes on your child's money.
  • If a large amount of money is to be transferred to your child, a gift tax applies. However, this is only the case if the sum exceeds € 200,000 within 10 years.

My conclusion: If you are sure that your child will handle the money conscientiously at the age of 18 or if it is a small sum of money, then a deposit in the child's name can be opened without worry.

At the same time, it makes sense from a tax point of view if you invest in securities yourself to keep the securities account in the name of the child. Your saver lump sum is not affected and the advance lump sum for the ETF tax thus takes up a lower sum of money.

If you have a specific purpose for your child's investment and the purpose is absolutely clear, then investing in your own name makes sense.

Junior Depot Vergeich: These depots can be opened in your name or in the name of your child

Many providers offer special depots that are offered as junior depots. You can use this to set up an ETF savings plan on behalf of your child. You can of course use any other depot in your name. You can find all providers, for all savings plans in the savings plan comparison.

Robo Advisor for savings plan for children: Recommended if you want to have less effort

Robo advisors, who invest your money in an automated portfolio, mostly consisting of ETFs, also have an offer for children's savings plans. So either a sub-account can be created for the child or there is the possibility to register his child directly. Then you set an investment strategy and savings rate. Then everything is invested automatically. So you don't even have to look for the ETFs yourself. A small annual fee is usually required for this. You can find more robo advisors in the robo advisor comparison.

Conclusion: An ETF savings plan is suitable for both small and large sums of money

If you start with a savings plan when your child is still young, you have plenty of time to save money for your child. It is best to set yourself a savings goal at the beginning. Should the money be used for studies, the initial set-up for the first apartment, a driver's license or even simply as an inheritance? Then you can decide how high the savings rate needs to be and when it makes sense to pay out and whether a deposit in the name of your child or in your name makes more sense.

You might also be interested in these posts:
ETF tax: How are ETFs taxed?
Sustainable ETF: How good are SRI & eco ETFs?
ETF retirement provision: easy, independent retirement with ETFs
Dividend strategy: that's behind it! With stocks & ETF strategy recommendations
Exchange for Beginners: What You Should Know

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Self-decider, savings plan investor & main author of Sparplan-Vergleich.com

I am happy to answer user questions in the comments or by email .

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