Do you think about what financial topics are really important for your children? Do you want to save for your child but don’t know what the right amount is? Does everyone give you different advice, but you’re unsure?
Why you learn so much from your child (before finances even come into play)
When your child is born or a child enters your life in a different way, a new chapter begins. You take on a completely new role as a mom or dad that you grow into. Even if your pregnancy or the mental preparation for adopting a child serves as a warm-up, this theoretical knowledge is far removed from what will actually face you in life with full love. From one day to the next, you are suddenly in a new role in life. Until now, there has been no mental preparation training for what awaits you. You learn a great deal every day when it comes to your parenting skills. This starts with diaper changes, guess-what-the-baby-has games, oh-god-hope-he’s-ok thoughts, reading aloud, playing, romping, being there, and giving love and mental support to your child in crises. As your child grows day by day, so do you! You want your child to do well and be the best mom or dad there is. Your child is your greatest teacher because they often take you out of your comfort zone and are unconditionally honest. When your baby is born, it initially requires its basic needs to be met, such as drinking, eating, sleeping and feeling safe. The only means of communication they have is crying. This time is about you getting to know your baby and your baby getting to know you.
Wealth accumulation for children is a topic that grows with your child.
Even though your baby needs you, it is also your greatest teacher because it teaches you what it means to love unconditionally, no matter how late it is and how little sleep you have had. You get to know new sides of yourself and you slowly grow into the responsible role of a mom or dad. Once the first few weeks and months are over and you’ve become used to the idea of having a child, you start to deal with various organizational issues for your child. In addition to childcare options, there are also financial considerations. This is a topic that will grow with your child.
What your child’s life stages have to do with your finances
At some point after the birth, grandmas, grandpas, aunts, uncles and friends will come to you because they have money they want to give your child. This is the moment when you start thinking about your child’s finances for the first time. You could simply run off, open an account, deposit the money and that would be the end of the matter. But before you do that, I recommend you take a look at the individual phases of your child’s life. Each phase has different financial challenges.
- Baby phase: Your child doesn’t need a lot of financial outlay in this phase. Diapers, toys and clothes are the things that cause the most expenses. You will probably be able to cover these things from your current income.
- Toddler to preschooler: Your child discovers the world and becomes aware of themselves. At this stage, your child does not yet have many financial needs. Hobbies such as swimming, horse riding, ballet or field hockey come into your child’s life at this stage. The first major expenses are the costs of childcare. These depend on which federal state you live in and how much you earn.
- Schoolchild to 6th grade: In this phase, your child has conscious financial needs. They see things other children have, e.g. smartphones or fancy clothes, and want to have them too. In addition to the “normal” costs, there are additional costs for school trips and other hobbies. If you want your child to go to after-school care, there will be costs that depend on your income.
- Student to 10th grade or high school graduation: Your child discovers certain talents and practices them regularly. These are activities that lead to additional costs. Your child may already be taking their moped driving license, which will have a significant impact on your finances. Your child makes a joint decision with you as to whether they will take their A-levels, start an apprenticeship or go to university.
- Apprentice or student: In this phase, your child learns a profession or acquires further knowledge by studying. This is the time when you will incur the most costs. Additional costs may include a driver’s license, their first car, rent for an apartment, or living expenses in another city.
There are various calculations that show how much a child costs on average up to the age of 18. These are the regular costs without special expenses, such as a driver’s license, rent, car, etc. How much do you think a child costs? On average, the sum is EUR 130,000 up to the age of 18. Further, it is important to state at this point that this does not include “special situations” such as studying at home or abroad.
3 concrete steps you can take toward building your child’s wealth
Before you start saving anything, it is extremely important for your financial success to take a strategic approach. Strategy means that you think in advance about what your end goal will look like and what individual steps you can take to actually achieve it. Defining an end goal makes it much easier for you to achieve it because you can plan your specific steps.
Step 1: Get an overview of the financial costs that can arise for children
When children are at different stages of their lives, various additional costs are incurred depending on the phase of life. In this step, you need to get an overview of what these specific costs might be. Think about what special events may occur in your child’s life. This step is not about evaluating what you would like to make possible for a child, but about defining wishes that may arise. Here is an example of possible costs: 
The figures in my example are subject to change. They are freely chosen examples. The actual costs may be higher or lower. If you can calculate the total amount that you may have to pay because you want to enable your child to do various things, this will give you more clarity about your monthly savings rate. The final sum you see is the value of the money from today’s perspective. The inflation rate can cause the value to change. Inflation means a change in the price level. Let me give you an example. If a loaf of bread costs EUR 3 today, then an annual price increase of 2% means that in 20 years, your loaf will cost just under EUR 4.50. This is an issue that you should take into account in your planning. The value of money changes. In the above example, this means that EUR 85,500 will become EUR 127,000 in 20 years from today’s perspective with an annual inflation rate of 2%.
Step 2: Think about the monthly savings rate you need
In the first step, you thought about the amount you would like to make available for your child. This sum is the end goal that you want to achieve. Now it is extremely important that you don’t simply start saving. Get an overview of what monthly savings rate will bring what result for your child’s finances. Is the result close to the figure you calculated in step 1? You have a good basis for making a better decision about your savings rate. This table gives you an overview of the savings rate and the final capital. The calculation is based on two different annual interest rates for your investments: 
In the table you can see very clearly that it makes a big difference WHEN you start building up capital for your child. The earlier you start, the greater the final capital you will achieve. This is called the “early saver effect”. Every euro saved in the first few years has a huge effect on the final result. This is due to the “interest rate effect“. This means that the more capital flows into your child’s account at the beginning of the term, the greater the interest that can be earned. You do not have the annual interest paid out, but it remains in the account. This means that your capital increases with the interest and you earn interest on the interest.
Step 3: Implement your plan
Now that you have an overview of the final sum and an understanding of the savings rate, it’s time to put your findings into practice.
You have several options.
- You can think about a monthly savings rate that you can put aside from now on.
- You can invest a once-off contribution as starting capital in your child’s account.
- You can use a mixture of the first and second options. This means you can opt for a monthly savings installment and add additional capital at special events such as birthdays or Christmas.
Make a decision that you want to start and don’t wait until the time is right.
If you only have a limited budget available each month, ask grandmas, grandpas, aunts, uncles and friends for support.
They are usually more than happy to do this because they can see that the child will have a great sum of money at their disposal later on, which they can use to fulfill various wishes.
If you have a plan for what you want to do, choose an investment that offers a good return.
CONCLUSION
When your child is born, a new phase of life begins for you step by step.
You take on a new role as a mom or dad, in which you grow with your child.
In addition to providing basic care, security and love, it is crucial that you start thinking about your child’s finances early on.
The different stages of your child’s life can help you with this.
You can get an overview of the financial issues your child will face.
If you proceed with a good strategy, you will achieve your goal for your child.
Get an overview of the costs your child may incur in the future.
This includes, for example, a moped and car driving license, their first car, rental costs for an apartment, living costs during their education and studies, a stay abroad…
Create a table in which you list the costs according to
- Events
- Monthly costs
- Annual costs
- Total costs
Once you have clarified this, the next step is to think about which savings rate or one-off contribution will help you achieve your goal. The earlier you start, the greater the effect on your end capital. This is called the “early saver effect“. You can reinvest the interest from your investment. This leads to the interest increasing your capital, from which you receive higher interest, i.e., the “compound interest effect“. Set a monthly savings rate, a one-off contribution or a mixture of both. The next step is to choose an investment that generates an attractive interest rate long-term.