One of the fears of most parents when they think about their children's future is that they will have difficulty finding stimulating, well-paid jobs in a market that, like it or not, is becoming more competitive and globalized, as well as uncertain, as evidenced by the various crises, economic and political, expected in 2025.
Why parents accumulate capital for children
It may seem strange to think about saving for a child, but it is important to provide them with a good education and perhaps even the opportunity to gain some experience abroad. To successfully achieve this goal, parents must be farsighted, which means long-term financial planning, starting from early childhood, that will protect their children today and give them the freedom to act tomorrow, so that they can follow their own path, whatever it may be. Parents have several options at their disposal, and we will consider the most popular of them, which are considered the most effective, taking into account such fundamental variables as costs, returns, risks and convenience. They are the answer to the question of how to save for children's education.
A fund for a child’s future becomes a priority from birth. After another difficult year that we have experienced, economic stability is decreasing, and Ukrainians are more aware of the importance of investing in their future, starting in 2025, which many see as the beginning of a new economic and financial cycle of stagflation. A great many Ukrainians consider savings to be very useful, if not necessary.
Here are a few reasons why building savings for children from an early age is more important today than ever:
- In a society where uncertainty is growing, investing in higher education has become more important: did you know that an initial investment of $5,000 and a savings plan that involves investing $200 per month for a child under 3 years old provides the opportunity to accumulate an amount sufficient to support a course of study at any European university?
- It's a gift: setting aside savings for children today, supporting them when choices and opportunities begin to weigh heavily, is the best gift you can give, and your child will be grateful.
- In life, you never know in advance: what you put aside today will be needed tomorrow to solve an emergency.
When investing, people often ask the wrong question: What instrument to invest in? How to allocate the plan? Instead, the question should be: What strategy is best suited to achieve the goals you set?
How to accumulate capital correctly
The climate of uncertainty is pushing families to manage their savings more prudently, accompanied by the search for long-term investment solutions that can guarantee their children the wealth they need to survive even in the most difficult times. Some of the tools that can help with investments for children and create a "nest" are government bonds, company stocks, deposit accounts, savings plans and others. Each of them has its pros and cons, but they should be carefully evaluated, taking into account cost and flexibility.
Traditionally, when people asked how to save money for a child, the answer focused on a few specific products, also traditionally designed for this type of investment. Unfortunately, today this type of instrument is no longer sufficient to generate long-term profits. Today, successful investment, especially in the long term, cannot do without the influence of financial markets, and is possible with the help of a gradual investment or savings plan.
In this section, we will look at several of the most common types of savings tools for a child, assessing their advantages and disadvantages. It should be remembered that time is an investor's best ally. If you have the opportunity to plan your investments for the long or very long term, use it when the question arises, how to save money for a child?
Deposit accounts
To preserve savings for children and grandchildren, a savings account is also a solution worth considering. The yields are notoriously low, but they are usually cheaper when it comes to term deposit accounts. In exchange for higher interest rates, you have to keep the wealth tied up for a set period, otherwise you lose the advantage of the higher interest rate and in some cases have to pay penalties. Although the yields are low, this can be a convenient solution for long-term investments for the benefit of smaller ones.
Life insurance policies
Life insurance can also be a good investment for a child who, when they grow up, will have some wealth to invest in, for example, university tuition or other important projects. There are different types of life insurance policies, which differ in duration, frequency of payments and flexibility provided by the contract. Some parents prefer to take out a life insurance policy in their own name, naming their children as beneficiaries. This is also a viable solution, and includes the possibility of covering other unforeseen situations: disability or incapacity of the parents.
Government bonds
In the field of long-term investment strategies, government bonds are an alternative that deserves attention. These government debt instruments, characterized by different maturity dates, provide an opportunity to make a reliable and stable investment in the future of descendants. The yield of government bonds, although not as high as in other investment options, has a significant advantage: they are guaranteed by the issuing state, which provides reliable protection and eliminates the risks of capital accumulation for children.
Another advantage of government bonds in the case of investments for minors is the so-called bonus mechanism. By holding the investment until the bond is redeemed, the investor can benefit from an increase in yield. This mechanism is designed to encourage long-term ownership of securities, increasing the potential return on investment.
Real estate investment: leaving a house to a child or grandchildren
Buying a house and passing it on to your children or grandchildren is a great alternative to saving and a valuable gift that is usually very appreciated. While waiting for the opportunity to transfer it to your child's name, you can rent out the property to cover the costs of maintaining the condominium, pay off any mortgages, and also accumulate a fund for reinvestment or gifting when your child comes of age. To assess the attractiveness of an investment, it should be compared to other financial assets, such as the stock market.
ETFs and mutual funds
Of all the financial assets we have considered, ETFs are the most liquid and versatile, as they are suitable for a variety of strategies, including investments for minors. They are cost-effective mutual funds that, in the long term, allow for exponential growth in income, especially if you take advantage of compound interest. Investing in ETFs means creating special portfolios adapted to the investor's risk profile, in the interests of the minor, who will then be the beneficiary of the investment.
Capital accumulation plan
When it comes to investments for minors, the acronym “Capital Accumulation Plan” may be the ideal solution. Opening an accumulation plan involves regular participation in and contributions to an investment plan. There are several reasons why it makes sense to choose such a solution. If you dilute the purchase of financial instruments over time, and your market entries are multiple and occur at different times, on the one hand, you are likely to reduce the average purchase price of these instruments, and on the other hand, you are limiting the risk of the investment by reducing volatility.
The result is always a higher investment performance: even during the worst financial market crises, losses are certainly limited. If you also take into account one of the most common psychological biases among investors, namely the temptation to disinvest during bad market times, you will understand that having a plan allows you to never lose sight of your goal.
Another fairly common temptation is to accumulate savings in a checking account, waiting until you have enough funds to start investing, but if you have to start thinking about your children's future, we advise you not to wait: the sooner you invest your fortune in the markets, the greater the chances of making a profit.
The offer has other advantages besides those listed above. It is an extremely flexible tool: you can reduce, increase, pause, and stop payments at any time without restrictions or additional costs, depending on your needs.
Is it possible to open investments for minors in Ukraine?
Unfortunately, no, the law does not allow minors to open a securities account or investment account (or rather, it is impossible without the participation of the minor's legal guardian). In fact, this should not be seen as a restriction, but rather as a protection. Many parents prefer to maintain control over the investments of minors so that they do not take it over themselves once they become adults.
Investing during a crisis
When it comes to planning the financial future of your children, choosing safe and reliable investment instruments is extremely important. These instruments are ideal for those who want to create reliable and protected capital. The period of crisis that we are currently experiencing is not an obstacle for those who want to make a profit using the financial markets. A pandemic and a war should not be a brake on an investor or a reason to postpone investments.
Cyclical market setbacks due to crises are often followed by recoveries that can be matched by significant gains. Long-term investments, by the way, are the ones that are least affected by cyclical downturns, as the inevitable market declines soften over time.
Conclusion
When it comes to the best ways to save for children, it's important to find a long-term, reliable, and well-diversified solution. But the most important thing is to control costs and find the most appropriate investment strategy for the very young investor who is lucky enough to have a particularly long time horizon.
