When it comes to saving for the education of the children or grandchildren, different products come into question, depending on the investment period, the desired flexibility and risk tolerance. With us you can read whether products are actually suitable for this and what advantages and disadvantages they have.
Setting the course
Before doing business, the first question you can ask yourself is why would you want the next generation to spend money? Did the grandparents give any money, should an inheritance be invested or do you just want to start with a savings plan to put something aside – as a start-up aid after finishing school and training? Depending on the occasion, goal and your expectations of the return on investment, there are various options.
- Save for the next bike or a bigger gift in a few years
If you need the money in just a few years and don’t want to take any risks, not even for higher returns, then stick with a simple savings account or fixed-term deposit account.
- Invest money for a few years, for example for the education of the children
If you are not dependent on the money for a longer period of time, then slightly higher returns are possible. First, banks pay higher interest rates the longer you invest the money. Take a look at the difference between a three-month fixed deposit and a ten-year savings bond. The savings bond is just as secure.
Important : Fixed is fixed, there is usually nothing to be done before the end of the term. In addition, for a longer period of time you may be able to invest the money with a little more risk, for example through an investment in the stock market, because you have time to sit out a bad phase. You can find out how to do this below. By the way, instead of an intangible financial product, you can also pay your children or grandchildren for music lessons or the club fee for sports, to name just a few alternatives. Investing in children’s education can also be an option that, in the long run, may benefit the child even more than an abstract investment.
WHAT “CONSULTANTS” LIKE TO SELL
The marketing of the financial institutions has long recognized the young target group – for customer loyalty but also as a lucrative source of income. Products have been specially created that are specifically offered to parents, but also to grandparents.
- Education insurance, child policy, child provision
If you expect this insurance to cover your child’s education, then you are wrong. Because unlike your house or your household effects, you cannot insure your training against risks. Policyholder and contributor is usually a parent or grandparent. The service is due at the end of the contract. In most cases, this is based on the beginning of vocational training or studies. If the parent or grandparent dies before all contributions have been paid, the full benefit will still be due. In essence, there are several benefits: protection against the financial consequences of the death of the parents or grandparents, and an investment for the child. For many products, additional risks such as accident or disability are insured to a certain extent. Each insurance service costs extra.
We advise against combining different services in this way. If you want to cover the risk of death or accident, then you can. Think about what service you need and inquire about your own insurance for this purpose. The insurance cover for these products is not a perfect fit; it often does not cover possible risks as required. In addition, a price-performance comparison for the individual components is not possible and the product is not flexible. For example, it is not so easy to have the credit before the end of the contract or to suspend saving for a long time. And if this does work, then it is often associated with financial losses. To make matters worse, high acquisition and administration costs also consume the return on these contracts.
- Pension insurance, generation policies
When it comes to old-age provision, intermediaries like to sell long-term pension and life insurance policies or so-called generation policies. The marketing departments of the insurers have come up with different names for these products. There is a simple reason why these products are popularly sold: The commission is calculated from the sum of the payments over the agreed term. The longer the term, the higher the commission for the agent and the less money is actually invested, especially in the first few years of savings. Retirement provision is primarily wealth accumulation, and there are other products such as ETF savings plans and bank savings plans (see below) that are much cheaper to get.
- Home loan and savings contracts
New home loan savings contracts are currently not a profitable investment. The credit interest rate is only slightly above zero percent and if you subtract all costs from the interest, it no longer pays off as a savings contract.
Home loan and savings contracts are often sold because the brokers receive a commission for them, the so-called acquisition fee. This is usually one percent of the home loan and savings amount, and there are also annual fees.
- Time deposit plus mutual funds
Some financial institutions offer higher interest rates for a limited period as part of promotional weeks if you also invest money in mutual funds. But be careful: you basically pay the higher interest out of pocket because you have to pay a front-end load to buy the mutual fund. This is the commission that the bank receives from the fund company. In addition, the bank will continue to receive commissions in the future based on the amount you have invested in the mutual fund. This is the sales follow-up commission, also known legally as “donation”. The excess interest is usually over after three months, whilst the new expenditures in the portfolio, at the detriment of the revenue, continue to have an impact for a long period.
This is how you can save with simple products
Children can learn how to handle money if they understand how to save. Savings books or overnight money accounts are particularly suitable for this. Both are straightforward and pose no risk. With the help of the savings account, the child can see at any time how much money he has already brought to the bank.
- Savings books, overnight money and time deposit accounts
Some banks offer slightly higher interest rates for child accounts as part of limited investment amounts. With direct banks that do not have branch sales, even higher interest rates are possible here and there. If the child should also experience saving themselves, then a local institute is probably the first choice. After all, they also invest a lot in their marketing budget for the young target group by luring them to World Savings Day every year with promotional gifts. It’s not entirely selfless, of course, so watch out for the next local advertising campaign. After all, the bank makes a living from selling its products for fees and commissions and from issuing loans.
- Bank savings plans
A bank savings plan is basically a savings account that you deposit into on a regular basis. In the current low interest rates, the range of bank savings plans is very manageable. However, some financial institutions still offer these products specifically for minors (e.g. as educational savings). You should pay attention to the contractual characteristics in doing so: under what circumstances is there an additional interest rate or even a bonus interest rate that depends on the term? Does the credit interest decrease if a certain investment amount is exceeded?
Can the rate be changed or suspended? Is an early (partial) termination possible or only with lower interest rates? Here, too, the money is safe, but the earnings opportunities are very limited.
- Fund savings plans / ETF savings plans
The return opportunities on the stock market are significantly higher than with the aforementioned products. In the long term, stocks are the most profitable form of investment, but for investors they are also associated with high fluctuations in value. If you are willing to take the risks of intermittent losses, a stock fund savings plan may be appropriate. You can also split the investment amount and thus opt for a mixture of a bank savings plan and a stock fund savings plan. The rates can be changed or suspended very flexibly free of charge.