Investing vs Saving for Your (Grand)Child

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This was something that I started thinking about not to long ago. People close to me recently got a child and were telling me that they saved €25 each month for the newborn. In this post I will show you the difference between just putting this money in a savings account or investing it in a simple ETF portfolio which frankly is just as easy in my opinion.

Savings account

Let start with looking at a savings account first. Currently in Europe interest rates on savings accounts are not high at all. I’ve looked at BNP Paribas Fortis and they offer a savings plan for children on which they currently guarantee an annual yield of 0.5%. Normally it should be higher, apparently the actual yield in 2018 was 2.0%. They do charge quiet high fees of 3.5% every time you put money into the account though. the last couple of years these fees go down but for the vast majority of time you’d pay 3.5%. You also have to pay 2% insurance tax on every deposit. The 2% is on the whole deposit amount before the 3.5% deposit fee.   If you would save €25 each month for 18 years the total amount saved would be €5400. If we would put our money in the BNP Paribas Fortis child savings plan best case scenario we get 2.0% each year. Taking into account the fees we would pay on our deposits, we would end up with €6188.90. This is already a little bit better. if you would take the worst case scenario where the annual yield would only be the guaranteed 0.5% you would end up with a whopping €5391.00. THIS IS LESS THAN IF YOU WOULD HAVE PUT YOUR MONEY UNDER YOUR MATTRESS. Here is a little recap on the expected return on a savings account for you child where you would save €25 each month:
  • 18 years of 0% annual yield: €5400
  • 18 years of 0.5% annual yield: €5391.00 (worst case scenario)
  • 18 years of 2.0% annual yield: €6188.90 (best case scenario)
The actual return will probably be somewhere between the worst and best case scenario.

Investing

For this part I am going to assume the money is put in an all world ETF or an ETF portfolio like the one i’m recommending here. For annual yield I am going to assume a 5.0% return which is a modest view of what such a portfolio is yielding the last decades. If we would invest the same €25 every month we would end up with €8606,03. This number takes into account Belgian tax of 0.35% every time we buy the shares and 0.35% ones we sell the shares at the end. Bare in mind that this is a theoretical number. In practice, when you are not able to buy fractional shares, this will mean that you can not invest the total amount of €25 every month because you will have to buy whole shares. For this reason I am going to take a more conservative number of €8000. 

Overview

For those scared of investing in the stock market I would call this the perfect case where you SHOULD do it. Since this money will not be directly yours you will probably be able to be more distant from it. Short term the stock market can be volatile. But if you invest 18 years or even longer the chances of ending up with less money than you started with are historically speaking 0%.

Lets give a quick final overview of the different cases:

  • 18 years of 0% annual yield: €5400 (Money under mattress method)
  • 18 years of 0.5% – 2.0% annual yield: €5391.00 – 6188.90 (Child savings account with bank method)
  • 18 years of 5.0% annual yield: €8000 (Investing in ETF’s method)

As you can see the difference is quiet significant. Even with my conservative €8000 number. Keep in mind that if you plan to invest for a longer period of time (maybe you’ll give the money to your child the day he graduates at the age of 23) the difference will be even bigger and the risk of being invested in the stock market will be smaller as well! Make you child happy by investing your money in the right place! 🙂

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