Anyone who starts financial planning after the birth of a child is already on the right track. But how can parents, grandparents, or other family members be sure that it is a lucrative financial product? Anyone who wants to financially secure the future of their offspring should also think outside the box and sometimes take a look at the stock market.
Should parents invest in an exchange-traded index fund?
A driver's license, university studies, vocational training, a stay abroad – the start of adult life can certainly be expensive. That is precisely why it is important for parents to start thinking about how they can provide for their offspring financially right after birth. One option is savings offers from housing cooperatives. These are regional real estate companies that are organized as cooperatives. The housing cooperatives subsequently generate capital through rental income. The money is reinvested in the interest of the members, who receive a dividend year after year. A form of investment that – according to Stiftung Warentest – is safe and can be recommended. Another option is exchange-traded index funds – so-called ETFs. These are a long-term form of investment that is certainly somewhat risky. Due to the fact that an ETF tracks stock indices, fluctuations in value are part of everyday life. But that does not mean that ETFs cannot be recommended – especially if parents want to invest their money over several years, they should opt for an ETF. The advantage is that even small monthly amounts can be invested if parents choose an ETF savings plan, which is offered by a direct bank, for example. Sometimes 50 euros/month is enough; 10 euros/month is also possible, although parents must of course pay attention to the custody account fees here. There are certainly providers that lure customers with low savings amounts but charge high fees, so that the return is eaten up. But which index is recommended? First of all: the MSCI World has been convincing for several years now. The MSCI World stock index contains 1,600 stocks from a total of 23 countries. Furthermore, the index can be weighted; the fees are also quite low.
What else should be considered
Even if the funds can be sold again via the stock exchange or the savings plan rates can be adjusted at any time, one should still consider a few tips and tricks. It is recommended, for example, to opt for flexible withdrawals. If the fund has to be liquidated on the child's 18th birthday, one may have to accept losses if the stock markets are currently in a weak phase. In addition, parents who are providing for their child must also take the withholding tax (25 percent) into account.
Why education insurance policies can by no means be recommended
But of course, there are also financial products that cannot be recommended. We are talking about so-called education insurance. The principle is simple: new parents pay regularly into a contract – the whole procedure is reminiscent of a capital life insurance policy. The disadvantages are also reminiscent of this traditional financial product, because the terms are long and the returns are extremely low.
