Investing for children: the longer the better
With a basic formula of investing being „time * money = capital“, the decades of life kids have in front of them make it very easy to understand why investing for kids is not just advisable, but frankly the smartest (and cheapest) way to build up wealth for the little ones.
Why invest for children?
We want the best for our children. While each child is individual and you need to pay attention to what they are good at so that you decide which hobbies or education they will pursue, it all requires money.
In Germany, you end up losing money if you just put it in the bank, due to inflation and almost no interest rates. So it makes sense to invest it. But the big question is how!?
I get asked by a lot of parents what kinds of investment plans are available for children, and since I am not an expert, my friend Verena from FrauFuture shared her expertise with us. Read below for her tips. Don’t let the numbers scare you, but if you have questions, contact her for a consultation. Details at the end of the post.
Invest for a long time
When the overall goal is to set the path as nicely as possible without spoiling the child or taking away their right to make their own experiences, setting the path financially comes down to a very simple formula: Time * money = capital, and by capital I mean wealth.
There are two things you need to build up wealth, time and money. The multiplication in the formula implies that both factors don’t need to be the same in amount. 5 * 100 equals 500, just as 25 * 20. So yeah, most young parents don’t have a lot of money to invest for their kids. But there is a lot of time.
A free accessible online calculator tells parents what outcome they can expect when they invest a specific sum over a specific amount of years in funds. When taking it on a test run, 25 € invested per month and over a period of 20 years lead to a total amount of ~ 9.000 € at an average annual profit rate of 6 % and to a total amount of 12.000 € at an average annual profit rate of 9 % – already after costs and taxes.
The sum parents invested themselves over the course of those 20 years is 6.000 €, meaning at an average annual profit rate of 9 % the invested money doubled.
Some more numbers!
This is not bad at all. But why stop there? Nobody said parents can only invest for the next 20 years until the chicken leaves the nest. Why not really take advantage of all that time kids have and start an investment for their retirement? Yes, I know, your child is just a baby and thinking about retirement seems absurd. But is it? The same 25 € per month invested for 67 years (the official retirement age in Germany) lead to a total sum of ~ 35.000 € (6 %) and ~ 75.000 € (9 %). Now, let’s assume your child takes over the investment at age 20 and doubles the amount to 50 € a month. This way at 67 the total sum would be ~ 140.000 € (6 %) and an insane ~ 425.000 € (9 %) after costs and taxes. No kidding.
But is this even realistic? Or is a 9 % average profit rate just wishful thinking? That depends. 9 % is absolutely possible when you invest in mutual stock funds/ETFs and you do so long-term. Long-term means anything longer than 15 years, and mutual stock funds/ETFs means investing in a variety of different companies that (should) operate in different markets and different countries, so you spread your risk of betting on the wrong horse.
A very well-known example is the so-called MSCI World. It is an index, so the combined performance of a specific group of, for example, companies. In the case of the MSCI World, more than 1.500 big companies operating in over 20 countries are included. So basically any big company you know is in there, and you can invest in all those companies by investing in an ETF that follows this index. And what is an ETF, you might ask? An ETF is a computer based fund, or in other words, it is a collective investment that allows you to invest in all those companies by really investing in only one ETF.
Those ETFs can be run by different investment companies. I checked the MSCI World ETF run by BlackRock. The average annual profit of this MSCI World has been at a respectable 8,54 % during the last 10 years if invested in Dollars, and at 10,45 % if invested in Euros . And that’s only the last 10 years. MSCI (Morgan Stanley Capital International) has been calculating this index since 1975, and ever since that year the annual average profit has been at 9,2 %.
Your child's retirement
So yes, 9 % is realistic, without any creativity or investor’s luck whatsoever. With 425.000 €, your kid could pay themselves 1.000 € of pension every month until age 100. If this investment was run by an insurance company, this pension would even be guaranteed life-long, even if they get 115 years old.
With the state pension and maybe a company pension adding to the numbers, your child would never have to worry about retirement. And all it took from your side was 25 € a month and some forward thinking.
I think this is a good deal. so if you haven’t started yet, there is no better time than the present.
Verena is a financial consultant the co-founder of FrauFuture. They organise workshops and seminars to help more women invest their money and plan their finances. Contact her for a consultation on investment plans.
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