ETFs provide a great way to save for your child. You can set them up for their adult life with much larger funds than with a savings account. Why is this? And what's the best way to invest in ETFs for your children?
Why investing beats a savings account for your child
Did you know that many parents (around 60%) put money into a savings account for their child? Yet only 10% invest in the stock market, according to Trends.
I wish my parents had invested money for me when I was born. Instead, they did as most did. They opened a savings account in which they and other family members deposited money from time to time. I'm very grateful to my parents that they did save for me. By the time I turned 18, I had a sizable amount that I could use to start my adult life. But it could have been so much more.
It's because, over time, savings accounts earn less than investing in the stock market. The bank pays a low interest rate on your savings, as it lends your money in the form of mortgages or other loans. But when you invest, you earn a dividend on the growth of the global economy. The stock market goes up and down, but the long-term average is a return that's much higher. And 18 years is plenty of time for an investment to compound. In fact, between 1900 and 2021, the stock market has returned an average of 6.9% per year.
Suppose your child was born in 2005. And every month, you save €50 for them. By the time they turn 18 in 2024, you will have saved €10,800 for them. Leaving that money in a savings account would have resulted in €11,050, thanks to (a small) interest. But, if you had invested €50 every month in a global ETF, your child would have €28,400 at adulthood. That's more than double. From 2005 to 2024, the ETF returned 5.5% a year on average. A savings account returned 0.13%. Taking into account inflation, the real return was, in fact, negative for a savings account. So if you want to build a nest egg for your child, a savings account won't do much for your long-term goals.
Why ETFs?
ETFs (Exchange-Traded Funds) are investment funds. They invest in hundreds, or even thousands, of stocks, bonds, or other types of investments. This diversification is an important benefit of ETFs. But here are several reasons why ETFs are the best long-term investment for most people:
- Best for the long term: Investing in ETFs compounds to high returns. And it beats the active funds sold by your bank!
- Diversification: You’re exposed to thousands of companies in one go through a single fund. And diversification is key to good investing.
- Simplicity: After choosing the right funds, you can relax and watch your investments grow. There's no need to waste time analysing individual stocks.
- Cheap: ETFs are a cheap way to invest. They enjoy economies of scale and have no active management costs.
So if you want to help your child build a nice nest egg for the future, investing in ETFs is a great idea. It's a smart way to set them up financially for their adult life. And of course, the earlier you start saving for them, the better!
How to invest in ETFs for your child
There are two ways to invest in ETFs in Belgium:
- Through a broker, where you manage your own portfolio of ETFs
- Through an app like Curvo, which takes care of the difficulties of investing by yourself
1. Buying ETFs with a broker
Investors trade ETFs on stock exchanges. The most popular stock exchanges are the New York Stock Exchange (NYSE) and Nasdaq. But, in Europe, it's better to buy ETFs on European exchanges. For example, Euronext Amsterdam or XETRA. To access a stock exchange, you have to go through an intermediary called a broker. There are several brokers that Belgians can choose from, each with their pros and cons.
Investing through a broker gives you the most flexibility. You have access to any of the thousands of ETFs available in the market. But, it's also the hardest because you're fully responsible for the management of your portfolio. You have to learn how to build the best portfolio for your child, how taxes work, which broker to use, how to select the best ETFs, make the trades every month...
2. Curvo: invest for your child with peace of mind
Curvo is a way to invest for your child while avoiding the complexities of investing through a broker. Over 200 Curvo members use the app to invest for their children:
- The right portfolio for your child: Answer a short questionnaire. Then, you can invest in a portfolio that matches your and your child's goals and time horizon. NNEK, an investment firm licensed by the Dutch regulator AFM, manages the portfolios.
- Invest on auto-pilot: Set up a monthly contribution where money is invested automatically. Adopt the best saving habits for your child without effort!
- Each euro you invest is put to use. With fractional shares, all the money is invested, unlike with a broker. No cash is left on the side.
- No transaction fees: There are no transaction fees every time you buy or sell. Also, the funds in the portfolios aren’t liable for the Belgian transaction tax. This saves you between 0.12% and 1.32% compared to a broker for every purchase or sale!
Investment account in your child's name or in your name
You can open an investment account either in your child's name, or in your own name.
In your child's name
As a parent, you can open an investment account in your child's name. They own the account. But you must manage the investments in your child's best interests. When they turn 18, they will have full control over the funds.
Only one broker in Belgium offers children's accounts: Keytrade.
Keytrade is convenient to use because it's Belgian, it handles all the taxes and administration for you. You also don't need to declare that you have a foreign account. On the flip side, Keytrade is among the most expensive brokers available in Belgium.
In your own name
If you want to control the investments, you can invest for your child. Just don't transfer the account into their name. This allows you to keep full control and decide when and how to give your child the money you have saved. When opening an investment account in your own name, you have many more brokers to choose from.
A downside of an investment account in your name concerns inheritance. If you pass before your child gets the funds, they must pay inheritance tax on the investments. In that case, gifting is smarter. The tax on gifts is much lower than the inheritance tax:
- Flanders: 3% for (grand)children
- Brussels: 3% for (grand)children
- Wallonia: 3.3% for (grand)children
The good news is that there are no limits on donations of ETFs and other investments!
You can go through a notary to formalise the gift, or do it yourself at your local municipality.
€1,000 of ETFs for every Belgian newborn
At Curvo, we believe in good investing. It's a great tool to improve people's financial lives. And we have this crazy idea: what if the Belgian state would give €1,000 worth of ETFs to every Belgian newborn? The children aren't allowed to touch it. It simply sits in an account and compounds.
Under this scheme, every Belgian who turned 18 in 2023 would have €4,000 in their account at the start of adult life. And the state had to contribute only 25%. Beyond the financial boon, each Belgian child would experience first-hand the benefits of compounding. This is an important lesson that will be sure to help them for the rest of their lives!
Summary
In conclusion, many Belgian parents prefer traditional savings accounts. But, they lack long-term growth potential. Low interest rates and inflation erode savings over the long haul. ETFs provide a promising route to long-term gain, fueled by global economic performance and diversified to reduce risk.
For the most flexibility, buy ETFs through a broker. You must accept full responsibility for the portfolio. You can open an account either in your child's name or your own name. But if you're looking for an easier option that brings you peace of mind, try Curvo. It's a great way to save for your child in an automated way.
No matter what you choose, start early and invest wisely. This will help your child's savings outpace inflation and grow for a prosperous future!