Planning for your kids finances or for your retirement, apparently are two sides of the same coin. If you fail to plan in your life’s springtime, then they will plan to fail in your winter days. While retirement planning is a dual responsibility shared with your spouse, child’s financial planning is an exclusive parental responsibility that demands meticulous planning coupled with the ability to foresee their future.
Raising a child brings with it lots of intrinsic joy, makes life more meaningful and beautiful, reminisces our childhood days and nurtures family bonding. Along with it, there is also a financial aspect which no parent can afford to ignore. According to the Federal Statistics Office, the average cost of raising a child in Germany comes around 160,000€ by the time he/she reaches their 18th birthday. This speaks only about the personal consumption expenditure i.e., food, clothing, housingand leisure activities. The cost of nursery, school (international school for expats), pocket money, university expenses are excluded from this.
Thanks to Germany’s child allowances(KinderGeld and Kinderfreibetrag) and tax relief provided by the state, but that does a little to offset a family’s financial burden. Therefore, every individual also must play their part diligently. The idea behind this article is to spread financial awareness when it comes to your child’s financial planning.
Create a savings account for your child
Today, banks have designated children’s savings account that you can open on their behalf. Older children, in fact, can maintain on their own thus making them feel more responsible for their finances from a tender age.You can opt for high-yield accounts which offer high interest rates, otherwise the interest rates are very nominal.
You can also create several sub-accounts, each focused-on a different savings goal so that you can keep on track with your budget and savings goal each month. The so-called children savings plan makes the head start possible.It helps them to reach a privileged position where they are just one step behind from fulfilling their ambitions once they turn 18.
Open a designated savings account with tax benefits
You can create a savings account exclusively meant for your child’s future e.g., higher studies, marriage etc. with a clear-cut goal of your saving target to achieve your financial goals for them. This way you can remain emotionally connected with the purpose of such account. It is best to choose one that offers high interest rate. Nevertheless, with the eighth wonder of the world i.e., with Compound interest working for those many years, you can expect very decent returns.
Remember that merely habituating yourself to put some money into this account every month, however meagre it may be, will help you to accomplish your goals for their future.
Little things that matter the most
Take care of your financial wellness:
- Your obligations towards life insurance which guarantees monetary benefits in case of your death.
- Paying for your health insurance that assures regular income in case of any kind of inability to work in future.
- Prioritize your pension fund in a mindful manner that suits your needs in later life. Investing in your child’s future is indeed fruit bearing but any negligence towards your retirement planningwill unnecessarily burden them. If your child is left alone to support you in your old age, that willadd up a significant financial burden for them.
Adhere to a budget
- Tracking your spending behavior helps you to identify your life’s choices.
- Realize how much you are saving each month and how much you want to save more. Segregate your expenditures into essential (rent, basic groceries, utility bills) and non-essential(entertainment etc.)
- Budget helps to change your spending pattern based on your strict compliance to it.
Motivate your children to save more:
- Give them allowance every week by which they can learn the art of saving money. Once they begin to value money, they will have a positive outlook with respect to spending mindfully
- Become financially discipline which in turn will help them to become financially independent.
World of Investment
Investing in your child’s future has never been more crucial than today. Our world and society are changing ever faster and more unpredictably. Investments in equities are gaining momentum, though slowly. Even an insignificant amount can yield high returns given a long tenure as opposed to investing money in a conventional savings account. In the latter, your money loses its value due to low interest rate and inflation. Inflation which is generally 1.5% – 2% will eat your money thus depleting your purchasing power. On the other hand, Germany offers negative interest rates for your savings account in many cases which is unheard of. Even with the Fixed Deposit Savings account(FestGeld), the interest rate is around 1% which is very minimal in terms of real value.
On the other hand, Equity investments are more profitable than any classic savings account. Thus, it is very important to have a highly diversified investment strategy with a long-term mindset. This is considered to be the best way to achieve good returns in the long run.As a beginner, ETF is one of the cost-effective methods to diversify their investment. To start with, one must choose a right broker and open a depot account to start an ETF(Exchange Traded Funds) savings plan. These plans offer great flexibility with no additional costs and can be paused or stopped whenever needed. These are not regulated by the Government but fluctuates depending on the market conditions.
An example of it is Scalable Capital, in which you can open a savings plan free of cost and invest as low as 25€/month.You can make your choice from a wide range of about 1000 ETFs. You can invest in different indices like DAX, NASDAQ,S&P500 etc.
Why ETFs
They are passive investment funds that replicates the performance of an index. It doesn’t require any special expertise in stock picking. They are significantly cheaper than traditional mutual funds and in most of the cases, performs better. They are safe, transparent, widely diversified, flexible and liquid. Above all, the commission costs and expense ratios are nearly negligible if chosen wisely. This makes it the best choice for your child’s financial security. On top of it, if left untouched for years, it gives amassive exponential return.
The money invested for your child must grow along with them. You need to have a mix of both- conventional and novel ways of saving plans for them. Your risk appetite shouldn’t be too low to be swallowed by inflation or too high to be galloped by market uncertainties. Tomorrow’s destination solely depends on today’s decision, a simple fact to be understood by everyone. You cannot achieve financial fitness with a January resolution that is abandoned by February.So, start with a plan after in-depth analysis and stick to it regardless of any temporary setbacks.
How we can help
We can help you in analyzing the future requirements of your child and to choose the right products. Feel free to book an appointment and discuss it individually for yourself and family