Greta Morkūnaitė. How do parents around the world take care of their children’s financial future?

How do parents around the world take care of their children’s financial future?

Starting an independent life comes with a range of financial commitments: higher education, owning a home and other expenses. As a result, some parents seek to make an early contribution to their children’s independent start in life. On the other hand, many of them face the same dilemmas: what are the most effective savings or investment tools and what kind of returns can they expect?

“As parents’ focus increasingly turns to securing their children’s future financial well-being, they are choosing to invest in it. The result is not only tangible benefits, but also valuable life lessons about saving, budgeting and spending. To help you choose the best solution, it is useful to look not only at the products offered in our country, but also at practices in other countries,” says Greta Morkūnaitė, Managing Director of NEO Finance, AB.

In this context, the company’s representative gives an overview of future investment trends in the US and certain European countries:

USA: 529 Program and Coverdell Education Savings Account

The 529 Programme is a tool used in the United States to encourage saving for future tuition and related expenses. The initiative offers two main plans: saving for tuition fees or prepaying tuition fees. Savers under the first plan can usually choose from a wide range of investment options, which often include exchange-traded fund (ETF) investments and structured financial instruments. A prepayment plan, on the other hand, essentially allows the saver to prepay future tuition fees and other compulsory charges at current prices.

“This way of investing, which dates back to 1996, is very popular in the States. Annual investment returns range from 4 to 6 percent, and at the end of 2023, over $471 billion was stored in 529 Program funds. The 529 funds have a total of USD 471 million. Parents can use these accounts to pay for their children’s college or private school tuition, as well as kindergarten and high school expenses. What makes this initiative unique is that the investment returns are not subject to federal tax” says Greta Morkūnaitė.

Europe: Individual savings accounts for young people

In Germany and France, some of the most popular ways of investing in a child’s future are through a combination of life insurance and investment deposits. This long-term oriented investment vehicle is safer, but its returns are relatively lower, hovering around 3-4% per year.

“Junior Individual Savings Accounts” in the UK allow parents and guardians to save or invest up to £9,000 per year on behalf of their child. In addition, the investment income is tax-free. The money saved grows steadily as a result of the investment activity, and the funds become available to the child at the age of 18,” shares the Managing Director.

And what investment instruments are available in Lithuania?

In Lithuania, parents can save for their children in savings accounts and deposits with banks and credit unions. In practice, investment life insurance is also a common choice. This solution not only helps to save the necessary amount of money, but also insures the child’s life and the risk of injuries and critical illnesses.