Should one save for the children? In your own or the child's name? How to save?
Many people ask themselves if you should actually save for the children. Saving children is not something you have to do, and must be assessed based on your current life situation. In other words, it is a good idea to think about whether it makes sense to save for the children in the current phase of life you are in.
The toddler phase
In the toddler phase, very many are newly established with mortgages and a very high debt ratio. In this phase, it is often best to prioritize repayment of the loan. This makes the family's finances better equipped for the future. You may want to have a rule of thumb that means that you should be able to service the debt even if the family is affected by a financial crisis, illness or e.g. long-term unemployment.
Saving on 1-2-3
1. If you have decided to start saving for the children, it is not as difficult as it seems.
2. First, the risk and savings product must be chosen. As it is the kids that should be saved for, the time horizon will preferably be 10-20 years. It will be beneficial to start saving in a global equity fund. A global index fund has very low costs and is tax-favorable when the savings horizon is long. We at Noon Invest have extensive experience in choosing a properly composed portfolio based on index funds. Feel free to contact us if you need help with this.
One last point that can be good to think about is whether the savings should take place in the name of the child or the parents. Financially, this does not matter, but it can be reassuring to know that the money will not be "wasted" at the age of 18.
How much does the savings grow to?
Here I have taken an example from smartepenger.no. Many who have the opportunity save the child benefit from the year the child is born until he or she turns 18. If these 970 kroner per month are invested in an equity fund, one can expect that the savings have grown to 238,000 kroner measured in the current monetary value, and adjusted for tax. This presupposes that the money is invested in equity funds. Today's child benefit is NOK 970 per month per child.
The question is how much this saving helps when the child enters the housing market. Banks offer youth loans up to 85 percent security. The child's equity must be 15 per cent. If the child is to buy a dormitory / apartment for NOK 2,000,000, this corresponds to NOK 300,000 in equity. Then the savings are already well on their way with 238,000 kroner. You can use smart money's calculator to calculate your savings: https://www.smartepenger.no/kalkulatorer/923-hva-vokser-et-sparebelop-til
Risk and location
The biggest concern I see when parents have to save their children's funds is the risk associated with investing. Many parents refuse this, which is also very understandable. What is important to keep in mind is that if the funds are only in a bank account, then tax and inflation are expected to eat up most of the excess return. Measured against the development in purchasing power, we can expect that wealth will be lost, and that one should therefore invest in equity funds.
Many people become extra attentive when we talk about equity funds. "Isn't there a lot of risk in mutual funds," they ask. Mutual funds can fluctuate sharply in value, but there are several factors that are a good solution for child savings. Two of these factors that help reduce the risk in equity funds are:
1) Savings through monthly deposits. Even the very best managers do not necessarily manage to "time" the market. With monthly savings, you get into different share prices. This reduces the risk of entering the stock market at the wrong time. You do not have to try to buy at the bottom and sell at the top, as you will get an average through monthly savings. In other words: it is at least not the stock market that keeps you up at night ..
2) Another factor that helps to reduce the risk in equity funds is that the savings are long-term. With a 10-25 year savings horizon, the fluctuations usually even out. It is important to remember and reduce the share of savings when the withdrawal of wealth is approaching. In this way, you reduce the risk of having to use the money just when the stock market has fallen sharply.
* This post is based on smartepenger.no's post about saving for children. To read the whole post, you can click here: https://www.smartepenger.no/104-sparing/2242-sparing-til-barn
- By Veronica Nesvik, Customer Manager at Noon Invest