ETF: Grandma wants to add something – no more cash envelopes!

The classic after a baptism, birthday or at Christmas. Grandma discreetly gives the grandchild a 50 euro note. What is well-intentioned often presents parents with a logistical problem. Either the money ends up in a savings box, where it gradually loses purchasing power due to inflation, or it disappears into the “black hole” of the parents’ checking account. At the end of the month, the amount for the weekly shopping or filling up the tank has been used up, and the original purpose, i.e. financial provision for the child, has been missed.

In order to build up real starting capital for children, it is necessary to say goodbye to the cash envelope. A structured, digital solution is not only more efficient, but also uses time as the most valuable lever on the capital market.

Investing Money for Children: The Mathematical Reality of Compound Interest and Inflation

Anyone who saves money for children has a decisive advantage – the investment horizon. With a term of 18 years, compound interest (i.e. the effect in which earned income is reinvested and in turn generates profits) develops its full power.

In the following table you can see how different monthly savings rates develop and how high the share of interest profits actually is in the end:

Important findings from the calculation:

1. The time factor is unbeatable: After 18 years, almost half of the final capital consists of pure market profits, not your deposits. The earlier you start, the steeper the curve will be at the end
2. Small animals also make mess: Even €25 per month leads to starting capital of almost €10,000. This shows how important it is to invest even small gifts directly instead of leaving them in the checking account
3. Use tax advantage: Since children have their own basic allowance and saver’s flat rate, these profits remain when they are invested in the child’s name (as in OSCAR² possible) is usually completely tax-free. With a profit of €16,840 (in the €100 scenario), this saves several thousand euros in withholding tax compared to investing in your own name

Important to know: The 6% is an average value. Since the markets fluctuate, the portfolio will sometimes be in the red. However, over 18 years, broad world indices have always developed positively in the past.

However, with a moderate inflation rate of ~2% per year, one-off cash gifts that are simply kept in a non-interest-bearing current account lose almost a third of their real value in 18 years.

The only sensible answer to this is to invest in the capital market, for example via ETFs (Exchange Traded Funds). These represent entire indices and enable broad diversification (risk spreading). Instead of betting on individual stocks, the capital is distributed across thousands of companies worldwide. This significantly reduces the risk of failure. In addition, modern children’s portfolios often work with accumulation. This means that dividends are automatically reinvested, increasing the compound interest effect without manual intervention.

Another point that is often underestimated is the tax aspect. In Germany, children have their own tax allowances (basic allowance and saver’s flat rate). If capital gains are earned directly in the child’s name, they often remain completely tax-free as long as the annual income is below the limit for the non-assessment certificate (NV certificate).

The hurdle of manual implementation

Theoretically, parents could open a separate portfolio for each child with an online broker, manually select ETFs and invest each gift of money from relatives individually. In practice, however, this model often fails due to its complexity and time expenditure:

1. Minimum order sizes: Many brokers only allow purchases from 25 or 50 euros. A 10 euro gift from your aunt cannot be invested immediately
2. accounting: Parents must document exactly which amount came from whom in order to keep track
3. Rebalancing: In order to maintain the selected risk profile (the asset allocation), the shares would have to be manually reallocated regularly, for example if stocks have grown more strongly than bonds

This is where the logic of modern asset managers comes in, fully automating the process. Serves as an example of such a solution OSCAR². The decisive advantage here lies in the technological infrastructure. OSKAR provides its own, dedicated IBAN for each child account.

Thanks to the IBAN approach, relatives no longer have to give parents cash or transfer it to their private accounts. You can conveniently pay directly into the child’s OSKAR account via standing order or individual transfer. As soon as the money is received, it is automatically invested in the ETF portfolio according to the chosen strategy. There is no idle cash balance and no need for parents to act as a “middleman” for the money.

Sustainability and risk management in focus

Modern wealth creation for the next generation should also take two other factors into account: ethics and security. Many parents today attach importance to ESG criteria (environmental, social, governance). This means that when selecting ETFs, companies that are active in controversial industries such as armaments or tobacco or that ignore environmental standards are excluded.

The asset allocation, i.e. the mix of riskier stocks and more stable bonds, must also be appropriate to the child’s age. While a high equity quota makes sense for a newborn due to the long term, it may be advisable to reduce the risk shortly before the 18th birthday. An automated service handles this rebalancing and ensures that the original strategy is maintained without parents having to monitor the markets on a daily basis.

A holistic approach also goes beyond pure stock ETFs. In order to additionally protect the portfolio against extreme losses of purchasing power, providers such as OSKAR integrate not only global stocks but also real assets such as gold or inflation-protected bonds into the investment structure.

Conclusion: Efficiency beats tradition

The cash envelope is a relic from a time when savings accounts still earned interest. In today’s market situation, it is a form of creeping expropriation of children’s assets. The transition to an automated, ETF-based solution is therefore essential and by issuing your own IBAN, as it is OSCAR² When practiced, saving for children becomes a joint project for the entire family.

It relieves parents of the accounting burden and ensures that every euro, regardless of whether it comes from grandparents, godparents or parents, immediately goes to work where it has the greatest benefit: in the compound interest cycle of the global capital market.

Frequently asked questions about the digital children’s depot

At what amount is the investment worth it?

Thanks to modern fractional purchases, you can start for as little as €25 per month or once. Every euro benefits from compound interest from day one.

Does the money legally belong to the child?

When opening in the child’s name (as possible with OSKAR), the child is the legal owner. This protects the assets and secures the child’s tax allowances.

How flexible is the savings?

Even if the investment horizon is long-term, the money remains available. There are no fixed terms. Payouts or adjustments to the savings rate are possible at any time.

What happens if prices fall?

Fluctuations are part of the capital market. However, since the money for the child lasts for many years, these phases historically balance each other out. A broad distribution across thousands of companies worldwide further minimizes the risk.

²Note: Oskar is a brand of Oskar.de GmbH, a spin-off of finanzen.net GmbH. Scalable Capital Vermögensverwaltung GmbH manages the assets, Baader Bank AG manages the securities accounts with clearing accounts. Further information can be found here.