Investing for a child

Time is an overwhelming advantage

When you save for a child, the time horizon is exceptionally long: often 15–18 years or more. The long time frame makes compounding powerful: even a small monthly amount grows into something significant. Starting early, from the child's birth, is therefore valuable. You can't buy time back.

The length of the time horizon makes saving for a child exceptionally effective. €50 a month for 18 years is €10,800 of your own money, but with a return of about 7% it can grow to more than €21,000 by the time the child comes of age. The earlier you start, the larger the share of the end result that comes from returns rather than your own savings. A start in capital given to a child is a gift that money has longer to grow than in almost any other investment.

In whose name

You can save in the child's own name or in your own name for the child. An account opened in the child's name is the child's property (a parent manages it while the child is a minor), and the assets pass to the child at 18. Saving in your own name gives you full control later on too, but for tax purposes the assets are yours.

Choosing whose name to use is in practice a choice about control and taxation. An account opened in the child's name is the child's property: a parent manages it while the child is a minor, but the assets belong to the child and pass into their full control at 18. When you save in your own name for the child, you keep full control later on too and can time the handover, but the returns are taxed as your capital income. Neither is automatically better. What decides it is whether you want to make sure the assets pass to the child or keep control yourself.

Gift tax

Money given to a child can count as a gift, on which gift tax is due once a threshold is exceeded. The same giver can give the same recipient up to the threshold tax-free every three years (check the threshold with the Finnish Tax Administration). Regular small monthly investing usually stays within the limits.

You don't need to plan around gift tax with small sums, but it's good to know the threshold. The same giver can give the same recipient a certain amount tax-free in three-year periods (check the current threshold with the Finnish Tax Administration), and both parents as well as grandparents can each give separately. Regular small monthly investing almost always stays within the limits. With larger one-off gifts (for example a grandparent's nest egg), it's worth working out the timing in advance, and remembering that returns that build up in the child's account are the child's income, not a new gift.

Putting it into practice

Putting it into practice is simple: a broad world index ETF + automatic monthly investing. The long time horizon allows a high equity weight. As 18 approaches, you can shift the emphasis to something more moderate if the money has a known purpose.

Putting it into practice is deliberately boring and repeatable. Open an account for the child (or for yourself on the child's behalf) with a regulated service provider, choose one broad world index ETF and set up automatic monthly investing. The long time horizon allows a high equity weight for the whole journey. For someone saving for a child, swings are noise, because there's plenty of time to recover. Only close to age 18 is it worth shifting the emphasis to something more moderate, if the money has a known concrete purpose such as studies or a first home.

What happens at 18

The most important moment for a portfolio saved in the child's name is coming of age: the assets then pass into the child's own control, and they decide for themselves what to do with them. This is worth considering in advance. A large sum in the hands of an 18-year-old can be either a great springboard or a temptation. Many parents soften the transition by talking about money in good time and teaching the basics of investing along the way, so that the portfolio is handed over not only as wealth but also as know-how. If you want to keep control for longer, saving in your own name is an alternative.

Glidepath: soften the final stretch

If the child's money has a known purpose in a particular year (studies, a first home), it's worth applying the same glidepath thinking as in retirement saving. A high equity weight builds the return throughout the journey, but during the last couple of years the weight is gradually shifted to bonds and cash, so that a crash just before the money is needed doesn't force you to postpone the plan. If, on the other hand, the money has no deadline, the equity weight can stay high for longer. The change is made according to a schedule decided in advance, not according to market sentiment.

Common questions and mistakes

A few things come up again and again in the questions of people saving for a child. “Do I need to choose a children's ETF or a special children's product?” No: an ordinary broad index ETF is almost always the cheapest and best. “Can I use the money myself?” Assets in the child's name belong to the child, not you. “Should I wait until the amounts are bigger?” On the contrary: starting early is the whole idea. The most common mistake is to put off starting until “a better moment” and lose exactly the time that makes saving for a child so effective.