The Savings & Investments Conundrum
The Money Doctor, John Lowe will be contributing regular articles to both the Senior Times website and magazine. He will also be speaking at the Active Over 50’s Shows in Galway and Dublin. Details of the shows and how you can get free admission are on the website
St Paul was accredited with saying the love of money is the root of all evil (1 Timothy 6:10) while Mark Twain quipped the lack of money is the root of all evil. Until a better system replaces “money” we are stuck having to save it so we can spend it. The idea of not spending some of your money now, so that you can use it later, is called ‘saving’. OK, OK, I know you know, but it had to be said.
Saving comes naturally to some people, and is extremely difficult for others. Like any skill, the best way to learn it is to practice. I don’t suppose you will find a self-respecting personal finance pundit who would recommend anything other than saving part of any money you receive. To what end? So that you have cash to hand for emergencies, sudden loss of income, major purchases or irregular expenses. You will also need savings if you want to buy property – 20% deposits seem an awful long way away. How big should your savings pot be? Opinions differ. I would say outside of major capital needs, enough to support yourself and your dependants for between three and six months. So that’s, about three to six months net annual income in a Rainy Day Fund (RDF) Where should you keep your savings? Where you can get your hands on them quickly – an accessible, on demand deposit account. Remember with savings up to € 100,000 per person, you are covered by the Deposit Protection Scheme via the government via the taxpayer – you and me.. The two best demand accounts currently are
- KBC Bank – 1.25% gross.. net 0.7375% after DIRT tax, maximum € 100K per person
- Rabodirect – 1.5% ( for the first € 20,000 and 0.75% thereafter )
Investments differ from savings in that they represent money you either don’t need in a hurry or, if you are a risk-taker, you don’t mind losing. All investment involves risk. This is because:
- either you are giving your money to someone else to make money for you, and so there is always the chance they will turn out to be crooks or idiots (or both)
- or you are buying something that may be worth less when you come to sell it.
However, there are lots of investments that aren’t really risky. Normally, the more money you stand to make from the money you invest, the higher the risk. As a general rule, if you do invest outside of deposit accounts, you should at least be aiming for double the return of the best deposit account ( best 14 month fixed rate – KBC Bank 1.55 % gross, 0.9145% net ) to justify this decision.
As far as safety and security are concerned, the government body National Treasury Management Agency’s State Savings, available online and through An Post offices, currently offer the best and safest deposit interest rate options – that’s if you want to stay in cash :
- National Savings Certificate – 7% tax free after 5½ years – equivalent to 2.1% pa gross each year
- National Solidarity Bond – 25% tax free after 10 years – equivalent to 3.83% pa gross each year
The National Savings Bond offers a paltry 2.5% tax free after 3 years ( equivalent to 1.41% gross each year ) and really not worth the investment. If you do invest in any of them remember to split the amounts so that if you do have to break the term, you will only be penalised on that amount withdrawn ( effectively you lose out on the interest ) All investments in State Savings are government guaranteed and have a maximum investment threshold of € 120,000 per person..
Start saving now if you have nt already and once your RDF coffers are full, you can then plan an investment strategy to suit your needs. Remember also to open a Regular Saver Account (RSA) to kick-start your saving programme, even if it is only to build up your RDF or just cover the costs of next Christmas ! ( RSAs allow you to save between € 100 and € 1,000 per month – no lump sums – with the best deals from Nationwide UK at 4% on a 15 month saving plan, and KBC Bank 3% for a 12 month saving plan and 4% if you open a current account with them. ) You WILL spend money on birthdays, anniversaries, holidays etc so why not provide for them ? A regular saver account is the ideal vehicle for these expenses. This year’s UK Budget introduced a saving scheme similar to our last government sponsored saving scheme ( the SSIA – Special Savings Incentive Account .. closed May 2007 ) to help the nation save. We in Ireland don’t need an incentive.
Not happy with the deposit rates ?
You will often hear people describe investment as being a case of ‘risk versus reward’. What they mean by this is how much risk they want to take for what sort of reward. The key things to remember about investment are that:
- You should diversify. In other words, don’t keep all your eggs in one basket but make sure you are spreading the risk by investing in different sectors, asset classes and globally.
- Over the long term, the highest returns have come from the stock market.
Currently we are in the 3rd longest and strongest Bull market ( a continuously rising market – just keeps going up irrespective of global events like ISIS, ebola, Ukraine, pro-democracy riots in Hong Kong etc ) and up over 200% since 9th March 2009. With the low interest rates likely to stick around for another couple of years and this Bull market set to continue, do you ignore ? If you want growth of any kind, you MUST be prepared to take a little risk.
- The majority of your money, say 90% for most people, should be in relatively low-risk investments, such as the stock market, property, pensions and bonds (a posh word for government and public company IOUs).There are now easy to operate, simple to understand investment vehicles such as managed funds ( Standard Life’s MyFolio funds, Irish Life’s Multi Asset Portfolio funds – MAPs – and Zurich’s Pathway funds to mention just three ) where you can swap at no cost out of more aggressive funds into safer ones with a phone call. Email me for details.
Finally when it comes to alternative investment options, do not feel compelled to diversify simply because others seem to be making money from their choices. Remember the wise words of James Goldsmith – if you see a bandwagon, it’s too late !
John Lowe is a Personal Insolvency Practitioner and Fellow of the Institute of Bankers, founder and managing director of Providence Finance Services Limited trading as Money Doctor and regulated by the Central Bank of Ireland (www.moneydoctor.ie ), plus author of the best-selling The Money Doctor 2015 For consultations and corporate seminars, call (01) 278 5555 or email email@example.com Follow John on Twitter (@themoneydoc) Linkedin & Facebook