Savings Accounts for Kids: How to Lay the Foundation Today for Your Children's Financial Future
Savings Accounts for Kids: How to Lay the Foundation Today for Your Children's Financial Future
A parent’s love for their children often leads them to look far into the future. They want to pave the way for their children and ensure that they get off to a good start in life without financial worries. Whether it’s for their first bike, a long-awaited toy, or later on for a driver’s license and college—a solid financial cushion provides security. But the world of finance has changed in recent years. Anyone looking to open a savings account for their children today faces a completely different situation than previous generations did.
Saving early on eases the burden later and provides financial security. This is a principle that many parents and grandparents have deeply internalized. Nevertheless, the question arises: Which investments really still make sense today? Investing money for children early on is one of the best ways to build long-term financial security.
In this comprehensive guide, you'll learn why the traditional savings account for children often turns out to be a trap when it comes to returns, and what options you have for building wealth effectively.
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Children's Savings Accounts: Why This Classic Option Is Often a Yield Trap Today
In Germany, the savings passbook has been considered the epitome of security for decades. Almost all of us had this little booklet as children, in which the savings bank or Volksbank recorded the amounts we had painstakingly saved. The balance in a children’s savings account is covered by statutory deposit insurance, which gives many people peace of mind. In addition, withdrawals from a children’s savings account are usually possible up to a certain monthly amount—often 2,000 euros—without a notice period. At first glance, this sounds like a high degree of flexibility and maximum security.
The Bitter Reality of Interest Rates:
Interest rates on children’s savings accounts are often very low—frequently even below 0.5%. When you consider that inflation erodes the value of money every year, it quickly becomes clear: The money in a savings account is gradually losing its purchasing power. Someone who deposits 1,000 euros for a baby today will likely be able to buy significantly less with that amount in 18 years than they can today. A savings account is therefore more of a place to store money than a tool for building real wealth.
❗ Losing Control at 18:
One aspect that is often underestimated is the legal situation. Legally, the child is the account holder of a children’s savings account, while the parents merely manage the funds until the child reaches the age of majority. Parents manage the savings account in a fiduciary capacity for the child’s best interests until the child reaches the age of majority. However, this also means that on their 18th birthday, the child gains full and sole control over the entire balance. Parents then have no legal recourse to prevent the money intended for college from being spent on short-term desires within a matter of weeks.
Saving for Children: Costs of Education, College, and Living Expenses
Why do parents start setting money aside so early on? A look at the statistics shows that children represent a considerable financial responsibility. Parents often spend 190,000 euros or more by the time their child reaches the age of majority. This estimate from the Federal Statistical Office covers only daily necessities such as food, clothing, and hobbies. The truly large expenses often don’t hit the family until after the child’s 18th birthday.
The cost of a college degree or vocational training can quickly add up to 30,000 to 40,000 euros. A college degree or vocational training isn’t cheap, especially since rent and utility costs are currently rising sharply. When you consider that a room in a shared apartment in major cities like Munich or Hamburg is now almost impossible to find for less than 600 euros, it becomes clear that a small amount in a savings account won’t be nearly enough.
Although the mobility transition is gradually underway, young people in rural areas in particular still rely on cars. A driver’s license has also become more expensive and often costs between 3,000 and 4,500 euros today. Those who don’t start saving early on will face financial pressure later. Saving early on eases the burden later and provides financial security.
| Expense Items | Estimated Costs |
|---|---|
| Driver's License & First Car | €8,000 – €12,000 |
| College (per year, including rent) | €10,000 – €12,000 |
| First apartment of my own (furniture, etc.) | €5,000 – €8,000 |
| A Year Abroad or a Trip Around the World | €6,000 – €10,000 |
Money Management: Teaching Financial Literacy Through Play
Saving is not just a mathematical process, but also an important educational topic. Teaching children about money at an early age is important for helping them learn to handle money responsibly. Experts recommend starting as early as preschool with small weekly amounts in the form of an allowance. Children who are introduced to the concept of investing at an early age often develop a better understanding of how to manage money responsibly.
Motivation Through Goals:
A clear savings goal motivates children more than the abstract act of accumulating money in an account. Whether it’s a new bike or a special set of toys—when children see their savings grow, they develop a love of saving. Parents can teach their children how to manage a savings account or passbook by combining clear examples, specific savings goals, and playful elements.
The 50-30-20 Rule for Young Athletes:
This rule helps older children manage their money wisely:
- 50% for essentials (e.g., cell phone plan or school cafeteria).
- 30% for immediate treats (movies, ice cream, little extras).
- 20% for long-term savings (the goal for later).
This way, they come to understand early on that managing money isn’t rocket science—it’s simply a matter of allocation and prioritization. Those who learn early on to set aside a portion of their income will find it much easier to build their own wealth as adults.
Junior Investment Account: The Modern Approach to Long-Term Wealth Building
If the traditional savings account for children is no longer an option, what alternatives are left? A junior brokerage account can be opened in the child’s name to build long-term wealth. Here, you invest in financial products such as ETFs or actively managed funds. Many providers allow legal guardians to open a special children’s investment account even at a young age.
The Power of Small Amounts:
If you start early, you’ll benefit from the power of compound interest and can achieve great things with small amounts. By making regular savings contributions—for example, through an ETF savings plan—you can accumulate a substantial sum over the years. A children’s account or junior brokerage account belongs entirely to your child and grows month by month. A junior brokerage account comparison can help you find the right provider for your needs.
The compound interest effect explained simply:
Imagine you invest money and earn returns on it. Those returns also earn interest the following year. Over 18 years, this results in exponential growth. Those who start saving for their child early on benefit from the power of compound interest. Regular saving is one of the most effective ways to build wealth, especially over a very long period.
The Big Return Comparison: Savings Account vs. ETF Savings Plan—By the Numbers
People often underestimate the actual impact of interest and returns over a period as long as 18 years. A small difference in the interest rate can add up to tens of thousands of euros in the end. Let’s take a look at what happens if you set aside 100 euros a month for your child starting at birth—half in a traditional savings account and half in a global ETF savings plan.
| Type of Investment | Monthly Savings Amount | Deposit (ages 18 and older) | Assumed annual return | Final Net Worth (after 18 years) |
|---|---|---|---|---|
| Traditional Savings Account | 100 € | 21,600 € | 0.5% | approx. 22,500 € |
| Call Money Account | 100 € | 21,600 € | 2.0% | approx. 26,000 € |
| ETF Savings Plan (Global Index) | 100 € | 21,600 € | 6.0% | approx. 38,000 € |
(Note: These figures are for illustrative purposes only. Capital markets are subject to fluctuations; past performance is no guarantee of future results; taxes and fees are not included here for the sake of simplicity.)
The results speak for themselves: While a savings account yields little more than the original deposit amount after 18 years, the ETF savings plan generates an additional profit of over 16,000 euros thanks to the power of compound interest.
Investing for Kids: Checking Accounts, Certificates of Deposit, or Stocks?
Choosing the right type of investment depends on the desired investment horizon and your personal risk tolerance. Parents should consider what they hope to achieve by investing on their child’s behalf. Different life stages call for different financial products.
The Call Money Account – Maximum Flexibility
A money market account is a flexible way to save money for children, since the funds remain available at any time. It’s ideal if you want to set aside money safely for the short to medium term, such as for upcoming purchases like a computer or a new bike.
While it does offer security, the interest rates here are often not high enough to outpace inflation in the long run.
The Fixed-Term Deposit Account – Predictable Security
A fixed-term deposit account offers planning security because the interest rate is fixed for the entire term. You deposit an amount for a fixed period (e.g., 3 or 5 years). This protects you from falling interest rates, but it also takes away your flexibility to access the money early. It’s ideal for amounts that you know for sure you won’t need for several years.
ETFs and Mutual Funds – Returns for the Long Haul
ETFs (Exchange-Traded Funds) and actively managed funds offer higher potential returns over the long term, but are also subject to greater price fluctuations compared to traditional savings vehicles. An ETF savings plan allows you to invest monthly in the stocks of a specific index. Since the investment horizon for children is usually more than 10 or 15 years, these risks have almost always balanced out over time.
Building Wealth: Taking Advantage of Tax Benefits for Your Child
A major advantage of having the account or brokerage account held directly in the child’s name: The tax office gives your child a cash gift. If the account is in the child’s name, the child can use their own savings allowance, which is currently 1,000 euros per year. This means that investment income up to this limit remains completely tax-free, provided an exemption order is in place.
In addition, parents can often apply for a non-taxable income certificate (NV certificate) from the tax office if the child has no income of their own. This allows them to receive even significantly higher amounts tax-free. In contrast, parents who save for their child in their own name would often have to pay tax on these earnings in full once their own tax-free allowance has been exhausted. You can find information on current tax rates and tax-free allowances at the Federal Ministry of Finance.
Legal Information:
Parents manage the savings account or investment account in a fiduciary capacity for the child’s best interests until the child reaches the age of majority. Legally, the money belongs to the child, which also protects it from access by third parties. Nevertheless, one should be aware of the consequences that come with turning 18.
Anyone investing money for their grandchildren should also consider the issue of gifts to grandchildren in order to make the best use of tax exemptions in this area as well.
Planning for Your Child's Future: Why It's Important to Maintain Control Beyond Their 18th Birthday
This brings us to an issue that concerns many parents and grandparents. With a brokerage account at a bank, a savings bank, or a neobroker like Trade Republic, the money becomes freely available to the child once they reach the age of majority. However, many parents would like to have more say in the matter. They want to ensure that the savings are actually used for a driver’s license, an apartment, or education.
What happens if your child suddenly has access to 20,000 or 50,000 euros at age 18? During a phase of self-discovery, there’s a high risk that years of savings will be spent on short-term dreams or consumer spending. This is where the Invest4Kids concept offers a key advantage over a traditional junior brokerage account or a simple savings plan:
- The right of determination: You decide when the child will have access to the assets. This prevents the capital from being spent during a period of impulsive behavior.
- Tax-Free Reallocation: With our specialized retirement plan, you can switch between funds and ETFs within the same contract without immediately incurring withholding tax. Your investment continues to grow uninterrupted.
- Flexibility: You can adjust, increase, or pause contributions at any time. Whether it's one-time payments from godparents for a birthday or monthly contributions from grandparents—anything is possible.
- Condition Verification: Your contract terms will remain the same throughout the entire term, even if laws change.
Investing for Children: The Right Path to Your Goal
Choosing the right type of investment is a process that begins with defining your goals. Do you want to set aside a small amount to help you get started in college, or are you looking to build a lifelong retirement plan? The recommended financial products will vary depending on your goals.
Tip for Parents:
Don’t let complicated terms intimidate you. The most important step is getting started. Whether you start with 25 euros or 200 euros a month is secondary. Consistency and the passage of time are your strongest allies. If you start investing money for your children early on, you’re well on your way to building long-term financial security. Online banking makes it easier than ever to keep track of your finances and set up savings plans with just a few clicks.
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- An additional €25,703 per child, thanks to our modern ETF strategy
- Find the perfect ETF investment for your child in a 30-minute video conference from the comfort of your own home
- Sit back and watch your child's wealth grow—our experts will take care of the rest
Comparison of the Most Popular Savings Plans for Children
| Model | Potential for Returns | Flexibility | Security | Age Restriction: 18 and older |
|---|---|---|---|---|
| Savings Account | Very low | Medium | Very high | The child has full control |
| Overnight Money Market Account | Low | Very high | Very high | The child has full control |
| Junior Portfolio (ETF) | High | High | Fluctuating | The child has full control |
| ETF Insurance | High | High | High | Parents Retain Control |
Each of these options has its merits. A savings account offers security for very small amounts but is unsuitable for building wealth. A money market account is ideal if you want to park your money safely for the short to medium term. The ETF savings plan offers the highest returns over long periods. ETF insurance provides the best combination of returns, tax advantages, and parental control.
Step by Step: How to Get Started with Investing
If you want to provide for your child or grandchild, you should take a structured approach.
- Define goals: What will the money be used for later? How much capital is needed?
- Set the duration: How many years are left until the planned access?
- Compare providers: Visit one of your bank's branches or learn more online about junior brokerage accounts and retirement planning options.
- Check costs: Be mindful of commissions, custody fees, and management fees. These will reduce your return over the long term.
- Start: Set up the savings plan and let it run automatically.
Regular saving is one of the most effective ways to build wealth. Once you've set it up, you hardly have to do anything else—you can just sit back and watch your children's wealth grow month after month.
Conclusion: It's time for modern solutions
The classic savings account for children holds a special place in our memories as a symbol of a child’s first earnings, but it has outlived its usefulness as a modern investment. Anyone who wants to seriously build wealth today must take advantage of the opportunities offered by the capital markets. Combining an ETF savings plan with the tax benefits of a junior brokerage account or an insurance solution is the best way to make your child’s dreams come true.
Saving early on will make things easier for you later and give your child the freedom to shape their life according to their own wishes. Whether it’s a trip around the world, college, or their first apartment—with the right foundation, anything is possible. Lay the groundwork today and ensure that your child starts their adult life with a strong financial foundation.
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Frequently Asked Questions About Savings Accounts and Children's Savings Plans
Below, we provide concise answers to the most important questions on this topic.
- Does it make sense to open a savings account for a baby?
- It’s a classic gift to celebrate a birth, but from a purely financial perspective, it’s the least effective form of investment. An ETF savings plan tracking the MSCI World Index offers significantly better prospects for building real wealth over 18 years.
- Can grandparents and godparents make deposits into the account?
- Yes, that's easily possible with almost all account types. Cash gifts for Christmas or birthdays are a great way to add to your savings.
- What happens to the money if I need it sooner?
- That depends on the type of account. Money in a demand deposit account is available at any time. Fixed-term deposits and certain insurance policies have fixed terms or conditions governing early withdrawals. Flexibility is an important factor to consider when making your choice.
- Are ETFs too risky for children?
- Stock markets fluctuate—that’s perfectly normal. However, since children have an extremely long investment horizon, these risks have always balanced each other out over time. The long-term return potential far outweighs the risk.
