A lot of parents save money for their children, maybe a deposit for their first apartment, to give them the chance of travelling the world or maybe to have some money put aside for a rainy day. Depending on how you save the money, they can either get it when they turn 18 or even later if you want. Regardless, it is important that the child has learned the basics of personal finance and saving when the day comes for them to handle the money on their own.
Saving money for your children when they are young means that the savings have a long time to grow, which does wonders for how much has been saved. Saving or investing often means that one can get interest or growth on the savings over the years. For each year that the money is invested or saved, you generally have more money in the account than at the beginning of the year. The following year, you get both interest or growth on the money you deposited from the beginning and also interest or growth on the money you earned in the form of interest or growth during the previous year. This is called the interest-on-interest effect.
Many people find this complicated, a concrete example can probably help.
You deposit €10,000 into a savings account with 10% annual interest.
After 1 year, you have €11,000 in the account.
€10,000 (The money you deposited from the beginning) + €1,000 (Interest on €10,000).
After 2 years, you will have €12,100 in the account.
€11,000 (The money you had in the account at the end of year 1) + €1,100 (Interest on €11,000)
After 8 years, you will have €21,400 in the account and that is more than double to what you started with. The €10,000 that you deposited from the beginning, and all you have done is wait, and after 18 years you have more than €55,500, almost six times more money than you deposited in the beginning.
This growth is the reason why Albert Einstein said that the interest-on-interest effect is the eighth wonder of the world and that it is the strongest force in the universe.
Saving for the children has the great advantage that it gives you as a saver the opportunity and a basis for talking about investments, saving and finances with your child. You can watch how the savings grow, many apps and websites where you can invest or save for your children provide graphs or other tools to show how the capital changes and grows. Here it is good to discuss why you have saved or invested as you do, what alternatives are available, and what you as an adult think the money should be used for, but also what the child wishes and dreams of.
There are many ways to save and invest for your children’s future, here are some basic tips:
1. Save monthly.
This way, it doesn’t feel as much in the wallet, and you increase the probability of depositing a larger part of the savings “at the bottom” and then see how the savings increase quickly.
2. Do it automatically.
If you aim to save money monthly for your child for 18 years, there will be 216 times (18 years times 12 months) that you have to think about what, how much and whether you have saved for your child. Save yourself the trouble with automatic savings deposits.
3. Save with low fees.
Many banks or others that help you set up and manage your savings for your child charge large fees for it. These fees erode the value of the savings over time and can cost you and your child thousands, completely unnecessarily.
Disclaimer: While the Gimi app is a great way to keep track of the weekly money and teach children about money at the same time, we currently do not offer any savings products.