The short, medium and long-term approach to saving
Hard-headed approach will help decide short, medium and long-term deposits
THERE were loads of articles written during the Covid lockdown about how families could save a few bob on everything from accounting to Zoom.
Baking your own bread, growing veg in the garden and switching your insurer were all enthusiastically offered as ways to keep your household finances under control.
I even wrote some of them. However, it seems we were so busy not spending our money that we created another problem: saving it.
With 80,000 people availing of the banks’ mortgage moratorium, countless others not paying their ‘second mortgage’ crèche fees and the majority still receiving their normal wages with some effectively ‘earning’ more by not working, via the Government’s wage bailouts, deposit accounts actually grew faster at the height of lockdown than at any time since the heady days of 2007.
Central Bank data shows €1.5bn more was saved over being spent in May alone.
The money languishing in deposit accounts, credit unions and post offices is now €10.5bn higher than all the money withdrawn or lent out over the last year, up almost 10pc.
This might sound like a good thing for individuals, but it’s very bad for the economy.
Covid created fear everywhere, mostly health related. However, people are a bit funny about money too. They tend to hoard when fearful, worried that worse may be yet to come. But with interest rates almost in negative territory once inflation is factored in, it’s more likely you’re actually losing money than making it.
I had a look at the CCPC’s latest deposit rate comparison for regular savers. The very best interest rate (from KBC) is a paltry 1.25pc AER which means someone saving €100 a month over a year (€1,200) would create a magnificent €8.13 in interest – before Dirt tax of 33pc is applied.
At the other end of the very short scale, 0.25pc is available (thanks a bunch, AIB), resulting in a forgettable €1.09 profit after Dirt.
Lump sums are even worse. Bank of Ireland offers a costly 0pc on €10,000. As your money will be worth less now than a year ago, you’re effectively paying the bank to mind it.
I’m often asked by people where they can save their money safely and get a decent return. I usually respond by asking them to pick one or the other.
I’m not being glib, but anything other than money-minding involves risk. Most of us aren’t prepared to take that risk with cash we might need. And that’s a good thing.
So, the question isn’t where we should save; it’s how we should save.
The SML approach
Why are you saving? If it’s because you think savings are a good thing generally, when you have money to spare, that’s the wrong answer.
Targeting your savings specifically for a known purpose is the right one. I do it using short-, medium- and long-term approaches.
Short-term cash is liquid – immediately available should you need it for an emergency. Financial experts say it should be around three months’ salary.
It should be away from your current account (in a different bank if you find yourself regularly ‘stealing’ from yourself) and be sent via standing order every month on pay day.
Savings are not something you do with ‘spare’ money, because nobody ever has any. It should be treated with the same discipline as paying your car insurance or gym sub.
Medium-term savings are for something up to five years away, such as a car change or school fees. Not quite liquid, but you can’t take a risk with it. Finding a bolt hole that pays a bit of interest will work, but not make you a fortune. It’s safe, secure and you add to it diligently (see panel).
Long-term savings (6+ years) can bear risks. College fees for toddlers and retirement planning should be done in consultation with a financial broker, who will assess your risk profile and advise accordingly. This is investing, not money minding.
Spend vs Save
If you have savings earning nothing, one of the most financially effective things to do is spend it! It’s worth more today than it will be next year. :: Paying down debt is a great way of using it. Most debt carries high interest (credit cards the highest of all).
Swapping money earning nothing for money costing you a fortune is good management and frees up monthly cash flow too.
Making the minimum payment (€25) on a balance of €1,000 can take over six years to clear. Paying it off saves €925 in interest alone.
:: Spending on maintenance (a washing machine, newer car, attic insulation) saves you money indirectly at a later stage when these might become more expensive.
:: Saving in a higher interest-bearing account but over a longer term is better than short-term, earning-nothing deposits.
:: Putting money in a pension means every €6 becomes €10 instantly, and for free if you’re a higher rate taxpayer. That’s an unbeatable deal for your money.
Putting money in a pension means every €6 becomes €10 instantly