Financial planning for our baby

With a baby comes not only a new family member but also an extra mouth to feed for the next 20+ years as well as an extra person to dress. In other words, there are some extra costs involved. This is all part of the game, but what is sometimes forgotten is to generate some extra income for him or her.

Income’ is perhaps a bit of a misnomer. I mean, of course, providing a little something for the future. This way they can have the best start possible.

We can save for our daughter in different ways:

• Investing via funds
• Branch 21 savings insurance (“Tak21”)
• Savings account

As such, there is no right or wrong way to save, but some methods are clearly more profitable than others. Lets go over them.

1. Investing through a (passive) index fund

The main but the riskiest way is through a fund. Because of the fairly long investment horizon of at least 18 years -or in my case 28 years ;)- the risk is well spread over time.

Thanks to the long time horizon, the risk of loss is virtually zero. In fact, if you take a time span of 20 years, there are no periods in the long history of the stock market where you have a loss at the end of those 20 years. Thanks to the stock market, you have a decent real return (real means taking inflation into account) of around 6%.

Active vs. Passive

How can you make use of this 8th wonder of the world by using funds?

Well, you have both actively and passively managed funds:

• Active means that there are managers who try to beat the general market.
• Passive is just the opposite. As little interference as possible to keep costs as low as possible.

Thanks to the low costs and because active funds do not outperform passive funds over a long period (think +10 years), active funds are not interesting if you can choose. So the best choice is to do it yourself with one of the many online brokers. I use Lynx.be but of course, there are many others.

Starting up yourself vs. the bank

If you are not comfortable opening an account and managing it, while limited, you can always choose to work through your (home) bank.
Although this is clearly more expensive and not recommended, you can easily start with a limited amount and make monthly, quarterly, or annual deposits.
As a customer, you also have a choice in the risk you want to take. Examples are KBC, Deutsche Bank, Belfius, Keytrade Bank, and ING.

Mind you, most of them offer active funds or even a step further, funds of funds, of course with the accompanying (high) costs.

2. Branch 21 savings insurance

The next possibility of saving is savings insurance, a so-called Tak21.

This is a savings product with a guaranteed basic interest rate over a certain period. On top of that, you can receive a profit cut every year if the insurer successfully reinvests your deposit. If the savings insurance runs for at least eight years, the proceeds are exempt from withholding tax.

A Tak21 savings insurance has the advantage that you can put the balance in your name and name the child or grandchild as beneficiary. You are also free to decide when the money is released. You can do that, for example, when the child becomes an adult, but you can also withhold it until he or she is, say, 30.

Hardly any return on your investment

But the interest guaranteed by the insurers is meager. The profit lies mainly in the profit share that the insurer can create.

An example of such Tak21 insurance is Secure 21 from Patronal Life. Currently, it offers a guaranteed basic interest rate for the entire period of only 0.05%, with a variable interest rate of 0.80% guaranteed for one year. The possible profit share depends on the results but was 1.45% for this product in 2020. But there are still:

• Entry charges on premiums paid
• Possible management costs
• And costs in case of an early exit

In summary, it’s barely worth your time unless you really don’t feel comfortable with investing in funds/stocks.

3. Savings book

Finally, I would like to mention the classic savings account for the little one. Ultimately, it remains the number one way of saving in Belgium – 295 billion in 2020! – although the least interesting, certainly in 2021 due to the extremely low-interest rate.

In Belgium, there are still some banks that offer youth accounts, but they are systematically declining. In the end, they do not offer much extra besides certain functionalities.

The interest rate on these accounts is like the ‘normal’ accounts, 0.01% basic interest + 0.1% fidelity premium, and therefore not interesting for the long-term parents have for their newborn.

No control after 18

Know that if you open a savings account in your child’s name, it is difficult to use the deposited amounts if you are in financial distress.

You also lose control over the destination of the capital once your child reaches the age of 18.

So you can decide to open the account in your own name, but if you die before your child reaches the age of majority, inheritance tax will have to be paid on it.

For us, the savings and investment strategy was never a discussion point. We both understood the obligation to invest through funds.

My wife is a bit more conservative when it comes to saving and investing. Still, she followed my reasoning of a longer investment horizon and how this justifies greater risk in favor of higher returns.

We will also open a savings account in her name for smaller amounts of money and cash gifts from friends and family.

On top of that, this account receives the pocket money that my employer gives to employees’ children. A nice little extra that I gladly accept ;). So this will be the account she will receive once she turns 18.

When it comes to how much we want to save for our daughter, we thought first about how we can give her a good start in life once she leaves home in, say, 20 years. What is also important is how much we can set aside in the first place.

As I am already a good saver, it is no problem for us to deposit a nice amount in an investment account. What shall we do exactly?

Here are my 5 simple steps to save and invest money for our daughter:

• Step 1: Open an Investor Savings Account. Simple, yet necessary. A good broker does not overcharge for transactions, doesn’t charge you extra fees like custody fees, and is easy to use. The first two reduce costs, so you have more money for returns. The last point is, so you are not discouraged by the platform. That is why we will use DEGIRO. With a few clicks, we have an account in my name ready to receive deposits. At a bank, you pay an advisor, the office, and often other trivial costs. Extra costs that don’t benefit your return. Therefore, it is still wise to roll up your sleeves yourself, provided you are well prepared.
• Step 2: We deposit a starting amount, €5000 in our case, on the investor account. If you do not have starting capital yet, start as soon as possible by putting some money aside at the beginning of each month. A good starting amount is €1000, but €500 is also good.
• Step 3: Buy a fund that invests in hundreds of companies worldwide. We will invest in VWCE; this is the code or ticker of a fund that does this. From then on, we will buy periodically, thus buying in good times and in bad.
• Step 4: Probably the most difficult. Even for me, this will not be easy: being consistent in buying periodically without trying to time the market based on current performance. Or purchase other individual stocks. The temptation is guaranteed to arise to take gambles with individual stocks to keep it ‘fun.’ Don’t do it! Certainly not with the account intended for your little one. The amount is less important.
• Step 5: Chill. With this one fund, you invest in the world economy and numerous companies in one step. Because we invest in the world economy as a whole, the world must perish before reaching zero. I think it is more likely that we will still be here in 20 years and that we will have improved.

Once we have taken the first steps and effectively started investing, in theory, there is not much more to do than ‘VWCE and chill.’ Nevertheless, my wife and I will try to talk about finance periodically and, from about 4 years of age, also talk with our daughter about it.

We want to teach her the basic concepts step by step to have a sound basis from an early age and know what to do with her first hard-earned money in her first student job ;).

The good thing about the savings account and the investment account in my own name is that no additional taxes are involved. Yay! At least in Belgium, and of course under certain conditions.

• The savings account: this is exempt from taxes (the so-called withholding tax or WT) as long as the interest stays below EUR 980 per year. If you know that most accounts yield a paltry 0.11%, you should already have €890.909 in an account before you owe this WT.
• Investments: This one is a little more complex but not by much.
  There is WT on income from the profit you receive from a company or fund, this piece of profit you receive is called a dividend. You owe 30% on this.
  The following regulations do not apply to funds, however:
  You can get WT paid by a company (such as Sofina, Kinepolis, etc.) back through your personal taxes. You can withdraw up to €812 of dividends. Note that this means you can get back a maximum of €812 x 30% = €243.60. So start with the RV of 30% first.
  In addition, you have the taxes you pay anyway when you buy or sell a share. This tax on stock exchange transactions (TOB) amounts to:
  • 0.12 %:
    • Bonds
    • Distribution-type funds (that distribute dividends)
    • REITs
    • Shares of funds registered as AIFM with the FSMA
  • 0.35%:
    • Shares
    • Real estate certificates
    • Shares or units of investment companies and funds, or trackers that are not included in a list of an EEA financial authority
    • All other securities which are not subject to a special TOB
  • 1.32%:
    • Trackers or funds of the capitalization type (that reinvest dividends)

The hidden downsides of this plan

Are there no downsides to this way of working? Well, no, there are. Two big ones to be honest.

1. What happens when I die? I.e., inheritance tax.
2. When me and my wife, God forbid, divorce?

Inheritance tax

This one is something I hope I don’t have to worry about anytime soon. I don’t plan on dying anytime soon after all. That said, what if I do?

In Belgium, the inheritance tax for direct descendants, i.e. my child is ‘only’ 3% in Flanders (where we currently live).

Ahum… Divorce

My wife gets into a bad mood whenever I mention the D. word. Once again, I don’t plan to let this happen, and will actively work on preventing anything that even remotely smells like divorce, but well. It happens, and more than we like to admit. So what then?

Luckily my wife was already investing and saving before she met me, so it’s not just me that sees the benefits of it. So here as well, I don’t foresee any problem protecting our daughter investments from this hypothetical event.