A good start can mean many different things, but for many it is also about saving for the children before adulthood.
Money that may be needed for the children’s first own accommodation, studies or perhaps the driving license.
The earlier you start saving, the longer you will have and keep in mind that even small sums grow over time.
So, how do you save for your child’s future?
The best way in my opinion to save money for your child’s future is to invest in funds, as it creates the conditions for the money to grow. This is money that will be picked out in 18-20 years, then it is stupid not to have let that money work for themselves during that time.
My top 4 ways on how to save for your child’s future
1. Determine the savings horizon for your child savings
Even before you start saving, you should have an idea of approximately how long you had intended to save.
Namely, it is decisive for which form of savings you should choose: one with higher risk but more potential, or one with lower and thus less opportunity for growth.
History has shown that investments in shares are by far the most profitable over time, but in the short term also the most risky as the market is impossible to predict.
On the other hand, a savings account with interest is a safe investment, where you know that the value of the money will never be less than what you set aside – but on the other hand there is the risk of missing the increase in value that can occur in the stock market in good times.
Therefore, you need to have an idea of how long savings will last.
If it is shorter – say five years – if you choose a savings account or fixed income funds, if it is longer – maybe 18 – you are probably the wisest to choose to save in shares or equity funds.
You can, of course, combine different types of investments, in order to have both some money in a short-term and less risky form of savings and some in a more risky form of savings that you hold over time.
2. Choose whether to save in a savings account, funds or shares
When you have an idea of how long you will save, it is time to decide which form of savings to choose: savings account, funds or shares – or perhaps a combination of these.
In this article, I will not go into more detail on what the different forms of savings mean, you can instead read this article:
I also do not want to go in and recommend one or the other – the choice is entirely up to you – but in general it is usually a good idea to think like this:
- Choose a savings account or fixed income funds if you are only going to save for a few years
- Choose equity funds or invest directly in stocks if you plan to save for a longer period of time
3. Save monthly or set aside a lump sum
Now you hopefully have an idea of which form of savings suits you best.
The next part you should consider is whether you should save monthly or set aside a lump sum.
The advantage of monthly savings, especially if you save in funds or invest in shares, is that you get an automatic spread of risk in that you buy in both ups and downs.
If, on the other hand, you have a lump sum to be set aside, you will miss this opportunity. If it is a larger sum, say $3000 or more, it can therefore be valuable to divide the deposits over time – provided that it is funds or shares you are to invest in.
If, on the other hand, it is a fixed amount that you plan to deposit in a savings account, you can do it as a one-time deposit – the sooner the better because the interest starts to be calculated from day one.
4. Save in your or your child’s name
Now it’s getting closer, but before you can deposit money, you need to choose whether to open a new account in the child’s name, or save in your own name.
Which choice you make has an effect on who has access to the money and when the money goes to the child.
Save in your own name
Saving in your own name is the easiest. Then it is you who owns the money and you who choose when it should be paid to the child.
This can be nice for you if you do not want the savings to be transferred immediately when the child comes of age.
Maybe you would rather keep control until the first apartment is bought, for a driver’s license or for studies abroad?
FAQ: How do you save for your child’s future?
1. How much should I save?
How much you should save depends on what the purpose of the savings is. If you want to help your child with money for a driver’s license, one or a few hundred bucks a month is enough.
But investing in a home requires 10 times as much capital.
Adjust the savings amount to what goal you have with the savings and of course your financial conditions.
The important thing is not how much you save but that you do it – and that you start on time.
2. What can I save in?
In an investment savings account or Roth IRA, you can save in both funds and securities, such as shares. On a endowment insurance, you save in funds. Whichever you choose, it costs nothing to change funds during the savings period.
Many people choose a broad equity fund with good risk diversification when they save for the children.
More and more people are also choosing sustainable savings in funds that opt out of, for example, investments in fossil fuels.
3. How high a risk should you take?
Of course, this is an individual issue, but in general it can be said that it usually pays to take a slightly higher risk when saving for children.
Higher risk certainly means that there is also a higher risk that the value of your savings may decrease, but since savings will grow for many years, there is also more time to make up for declines.
A slightly higher risk thus means that you have a greater chance of getting a good return on your savings.
Saving on an account with low or no interest is in most cases an overly cautious strategy.
However, it may be wise to adjust the level of risk as the day on which the money is to be used approaches, in order to avoid sharp declines in connection with the child receiving the money.
4. Can I make changes during the save time?
You can always make changes to your savings during the savings period, for example changing the savings amount or switching to other funds.
If you save in your own name, you completely control the savings until the child receives the money.
If you save in the child’s name, you need a parental power of attorney that both you and the other parent have signed in order for you to be able to change funds, for example.
5. How do I save fairly for siblings?
If you have several children and save in their own name, the value may be different depending on how the stock market has gone because you start saving at different times.
To get as fair a savings as possible, it is better that you save for all the children in an account in your name.
Then you can divide the savings into equal parts per child when you think it’s time for them to get the money.
6. How do I start saving for my grandchildren?
If you want to save in the child’s name, you need the approval of the child’s guardian, usually the parents.
Then the child gets access to the money on the 18th birthday. If you instead save in your own name, for example in an investment savings account, you can hand over the money whenever you want.
Just remember that the money goes to the estate if you die.
With a will, you can then ensure that the child receives the money, but it requires that the value of your other assets is sufficient for your children to also receive their share of the inheritance after you to which they are entitled according to law (equivalent to half of the estate).
You can also choose a endowment insurance.
Then you save in your name with the child as the beneficiary.
7. What happens to the money if I die?
If you save in your own name and something happens to you, the savings will be included in a possible division of property.
This means that someone else, such as a spouse, can get the money. With a will, you can make sure that the money goes to the child.
If you instead save in the child’s name, he or she will have access to the money on the 18th birthday, no matter what happens to you.
To save for your child’s future is easier than you think and the key to success you may ask? Time and the magic of compound interest.
If you just start early and put in a few hundred dollars every month in a low-cost index fund and wait 18 to 20 years then I know for a fact your child/children will have a bright future a head.
Also: Top 3 Ways To Invest For Your Children’s Future