Today, modern alternatives—from high-interest savings accounts and ETFs to dedicated children’s investment accounts—offer more promising options. But which are truly worthwhile, and what should families consider before choosing?
Start with a Goal and Time Horizon
Before putting money into any investment, parents should determine its purpose. Is the goal to fund a driver’s license, college tuition, or a first apartment? The answer shapes the savings strategy and duration. Will the funds be needed within a few years or only at age 18? The time frame is a major factor in selecting the right financial product.
Risk tolerance is equally important. Higher potential returns come with greater risk. Financial experts refer to this trade-off as a “risk premium”: those willing to accept more uncertainty can potentially gain more—but also risk greater losses.
From Piggy Banks to ETFs: Available Options
Some still rely on cash savings—for example, using a piggy bank. While simple and risk-free, cash offers no return and steadily loses value due to inflation. It’s not suitable for long-term goals.
Classic savings books provide minimal interest rates that rarely outpace inflation. Slightly better are high-yield savings accounts, which offer modest returns, low risk, and immediate access to funds—unlike fixed-term deposits that lock money away for longer but usually offer higher interest rates. Both savings types are considered secure due to government-backed deposit insurance.
Children’s Investment Accounts and ETFs Offer Growth Potential
An increasing number of banks and digital brokers offer specialized children’s investment accounts. Key factors to compare include account maintenance fees and trading costs. Many financial advisors recommend ETF savings plans for long-term investing. ETFs (Exchange Traded Funds) track a market index—like the DAX or MSCI World—and are widely seen as low-cost, diversified, and relatively safe options.
Ralf Scherfling from the North Rhine-Westphalia Consumer Center advises parents to reduce equity holdings a few years before the planned withdrawal to avoid the risk of a market downturn just as the funds are needed. Additionally, parents should check which bank backs the online broker they’re considering.
Ownership, Taxes, and Legal Considerations
If an investment or savings account is opened in the child’s name, the funds legally belong to the child. Until they reach adulthood, parents hold managing authority and must act in the child’s best interest.
Accounts in the child’s name also bring tax advantages. Each child is entitled to a savings allowance of €1,000 per year. With no additional income, they may also benefit from the basic tax exemption. However, a larger asset base can reduce eligibility for future financial aid like Germany’s Bafög student grants.
The Best Time to Start Is Now
Experts agree: the earlier the saving begins, the better. Starting early gives compound interest more time to work, significantly boosting long-term gains. The monthly contribution should reflect the family’s financial situation. Those with greater flexibility can set aside more.
Consumer advocacy group Finanztip advises making regular small investments rather than waiting to invest a larger lump sum. Over the years, even modest monthly contributions can grow into a substantial amount.
Plans May Change
Parents should be prepared for the possibility that their child might use the money for purposes other than originally intended. Whether the funds go toward education or a motorcycle, there’s no way to legally enforce specific usage when it comes to private savings.
What Are ETFs?
ETFs, or Exchange Traded Funds, are investment funds that trade on stock exchanges and follow a specific market index like the DAX or MSCI World. They bundle numerous securities into one investment, providing broad diversification. ETF holders essentially own a portion of all the companies or bonds in the fund.
Advantages of ETFs:
- No fixed term: ETFs can be bought or sold at any time.
- Low fees: Management costs range between 0% and 0.8% per year, significantly lower than the 1.5–2% charged by actively managed funds.
- Diversification: Holding many securities spreads risk.
Disadvantages of ETFs:
- Price volatility: Like all equity investments, ETFs can fluctuate in value, making them unsuitable for short-term savings.
- Not all ETFs are suitable: Products like crypto ETFs are riskier and not ideal for long-term saving.
Conclusion
Parents looking to build financial security for their children should begin saving early, choose an appropriate investment strategy, and commit to regular contributions—preferably via diversified ETFs in a low-cost children’s account. In addition to returns, legal, tax, and emotional factors should be considered. With a thoughtful plan, families can lay a strong financial foundation for their child’s future.
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