Thinking about your child’s future is a natural part of being a parent. And with the ever-increasing cost of education and living expenses, many parents are considering investing for their children’s long-term needs. But is investing the right choice for you? This blog post will explore the benefits of investing for your child in Germany, along with the different options available and important considerations.

Why Invest for Your Child in Germany?

Traditional savings accounts often offer low-interest rates, meaning your money may not keep pace with inflation. Investing, on the other hand, has the potential for higher returns, allowing your child’s savings to grow significantly over time. Here’s a quick calculation to consider:

Imagine you invest €250 per month in a broad market ETF with a 7% annual return (adjusted for inflation). By the time your child turns 18, their investment account could be worth over €101,000 compared to just €54,000 if you kept the money in a savings account with a 3% interest rate.

Investment Options for Children in Germany

There are two main ways to invest for your child in Germany:

1. Opening a Children’s Investment Account: Several banks in Germany offer investment accounts specifically designed for children. These accounts often have low fees and allow you to invest in a variety of assets, such as ETFs.

Here are some questions to consider when choosing a children’s investment account:

• Does the bank require a minimum deposit?
• Are there any monthly fees associated with the account?
• What types of investments are available?
• Does the bank offer automatic savings plans?

2. Investing in Your Own Portfolio: You can also invest for your child using your own investment account. This can be a simpler option if you already have a brokerage account. However, there are some tax implications to consider.

Here are some questions to consider when investing in your own portfolio for your child:

• How will investment profits be taxed?
• What happens to the investments when your child turns 18?

Important Considerations Before You Invest

• Investment Horizon: The longer your child’s investment horizon, the more time the money has to grow. Investing for a child leverages the power of compound interest, where earnings generate further earnings.
• Risk Tolerance: The stock market can be volatile. Are you comfortable with the potential for short-term losses? Consider your own risk tolerance when choosing investments for your child.

Taxes and Your Child’s Investment Account

There are tax benefits to consider when investing for your child in Germany. Children have a tax-free allowance of €1,000 per year for capital gains. This means they can earn up to this amount from their investments without paying any taxes.

Summarizing

Investing for your child’s future can be a wise decision. By starting early and taking advantage of compound interest, you can help your child achieve their financial goals. Carefully consider your options, your risk tolerance, and the tax implications before making any decisions.

Ready to learn more? This blog post provides a great starting point, but it’s important to do your own research before investing. Consider consulting with a financial advisor to discuss your specific situation and goals.