There was good news during the week when two banks announced mortgage rate cuts. Borrowers are now the happy victims of a price war between lenders which, if they are in the market, is great. But in the swings and roundabouts world of personal finance, what’s good for the goose definitely misses out the gander.
Savers, who haven’t had much luck in the past decade or so, find themselves once again at a loss. You’d imagine, in an environment of not only zero returns but negative growth (once you take inflation into account, it’s costing savers to keep their money on deposit), they’d be withdrawing cash in droves and sending it elsewhere. In actual fact, we’re increasing our savings, with around €100bn in banks, post offices and prize bonds.
Household net worth now exceeds the 2007 peak at €800bn, or €162,577 for every man, woman and child in the country.
Much of this figure is bound up in property, with prices having risen so much of late. But it doesn’t account for the massive amount sitting dormant in accounts doing absolutely nothing.
The amount households collectively owe is dwarfed by the savings they have. This is the kind of conundrum that gives economists sleepless nights.
When money is cheap (and at present, it’s bordering on free) to borrow, people typically ramp up their debt. They buy stuff on credit and get rid of their savings.
This in turn leads to inflation, which causes banks to increase interest rates to stall borrowing and encourage savings back in… and so on.
The opposite is happening. Who are the depositors? Well, they’re you and me. Why are we not connecting the dots? Most ordinary people juggling bills, managing a credit card or other loans see no dichotomy in also holding on to savings ‘for a rainy day’. Most of us don’t do what Economics #101 would suggest and transfer our low-earning savings out and pay off high-interest debt.
The reason is that people aren’t, of course, economic models. They are families with real fears, hopes and dreams. They hang on to savings, even though they’re making no money, because they’re worried what’s around the corner.
It could be our memories of recession, worried pensioners, potential job losses, Brexit… who knows?
So, this week, I’m looking at a more objective way to view your money; how to find that elusive return but keep it safe. And here are some ideas about using it smartly.
Why are you saving?
The first question to ask yourself is what you are saving for. Just because it’s a good idea is not good enough. All savings should have a purpose. Ideally, the purpose should be named (literally, on the account), and time-lined.
If you need it completely safe and will be spending it within the next five years, then keep it on deposit. Anything else is too risky (see panel for some rates available). But essentially, this, in today’s climate, is simply a money-minding tool.
A new car in 2023; Benidorm or Bali 2021; college fees for Oisin; Mary’s wedding.
It gives impetus to your saving and means you’re more likely to stick to it. It’s harder to ‘steal’ from yourself.
Have a few deposit accounts – they’re free to set up – and name them all. It doesn’t really matter how much you put in but follow some simple rules:
– Transfer cash in regularly, habitually, on pay day. Savings aren’t ‘leftover’ cash; they’re a necessary outgoing like your utility bills.
– Split savings among your different priorities.
– Try not to touch them until the event arises, but have an ’emergency’ or ‘household’ fund separately.
– For anything longer than eight to 10 years away, forget savings; you need a proper investment strategy in longer-term instruments like bonds or insurance products. Otherwise, your money will have less buying power when you need it than it does now.
Deal with debt
Paying down debt is a great way to use savings not immediately needed. There is little point having a credit card bill outstanding, while savings are tucked away on deposit.
A debt of €3,000 at 22.9pc interest would take over 13 years to clear, just making a minimum payment of 2pc. Fire your savings against this and you’ve saved on the double.
Now is the time to get that new dishwasher, treat the family to a weekend away or spruce up your spring wardrobe. Spending money not earmarked for other things is a better bet than shoring it up and paying DIRT tax (35pc) on anything you do make. Buying Irish goods and services helps the economy too.
Investing in peer-to-peer lending is becoming more popular. But it’s not without risk, and is currently unregulated in Ireland, so do your homework.
Every €6 becomes €10 for higher-rate taxpayers. While you can’t access your savings until retirement, there remains no better, more tax-efficient way to invest your money in Ireland.