Our reaction to shock is fight, flight or freeze, psychologists say. When it comes to our spending, the pandemic’s upending of life as we know it has led us to freeze. The result is a record amount of savings on deposit. But as life opens up, should we spend it, invest or keep saving?
Big freeze, slow thaw
The shock came about 18 weeks ago. On March 12th, the lights went out in schools, colleges, creches and offices, and former taoiseach Leo Varadkar asked us to stay mostly at home. The Covid-19 pandemic was going to involve "big changes in the way we live", he said. By not going out we could save lives. So we stayed mostly at home, and our wallets did too.
The restrictions meant we couldn’t spend if we tried: no work-day sandwich or coffee; no outings to the pub or restaurant; no trip to the cinema; no mid-term (or any other) holiday breaks; no weddings, communions or confirmations; no birthday parties, haircuts or much else requiring spending.
Dire economic forecasts were off-putting too. Yes, our spend on groceries initially surged. Levels of online shopping increased too as desperate work-from-home parents ordered jigsaws and trampolines to occupy little ones, while bored teens were mollified by gaming and clothes.
Still, those lucky enough to continue to work and be paid saved record amounts.
The incomes of lower-paid workers, those in the construction and hospitality sector, for example, were disproportionately hit by the pandemic, with many relying on government subsidies. However, even some 200,000 of those in receipt of the Covid-19 pandemic payment were better off unemployed than they had been while working, Government figures show. Some of those may have put some money aside too.
So, what do our bank accounts look like?
Household deposits rose by €3 billion in April, followed by growth of €1.5 billion in May, according to Central Bank figures. That is the biggest increase since records began in 2003.
Household deposits now stand at an all-time high of €118 billion. Another increase is likely to have occurred in June, says EY chief economist Neil Gibson.
Personal finance gurus have long urged consumers to try one “no spend” day a week. With over 100 such days, consumer savings have gone into overdrive.
Depressed consumer confidence and a curtailment of opportunities to shop means some bank balances have never been healthier. Those emerging from all of this turmoil with extra savings have some choices to make – to keep saving, to invest or to spend.
Rainy day save
Coming out of lockdown the urge to splurge is real. Bored of your house, your garden, your clothes, your hair and yourself, it’s normal to want to shake things up.
A kitchen revamp, new garden furniture, going-out clothes, balayage highlights (don’t ask) and restaurants all beckon. Woodie’s reported last week that having reopened on May 28th, June had seen the highest monthly spend on record in its Irish stores.
But be smart.
"Make sure you are getting value for money and not just buying for the sake of it," advises Michelle O'Hara, south Leinster manager of the Money Advice and Budget Service (Mabs). "The money you save on resisting the temptation, or by only buying what you need, can go into your rainy-day fund."
Ah, yes, the rainy day fund. If you’ve never had one and lockdown has enabled you to save, don’t squander it. Ideally amounting to between three and six months of your net annual income, a rainy-day fund provides a vital safety net should your income be hit or if you are faced with an unexpected expense. So if you are still not sure what your financial situation will be like in the coming months, hang on to some of those savings.
If you rely on an annual bonus or pay increase to cover Christmas, think again
A return to semi-normal life means a return to spending. Childcare facilities are reopening bringing relief to parents but a return of fees. The new school year is tantalisingly close, and with it the outlay for books, uniforms and activities.
Those who return to commuting will see their daily costs edge up too.
And households in receipt of a government subsidy should bank on paying some of it back. Workers drawing down the special pandemic unemployment payment or the temporary wage subsidy face tax bills potentially running into thousands of euro at the end of the year, according to calculations from personal finance advisers Taxback.com.
If you rely on an annual bonus or pay increase to cover Christmas, think again. Some businesses have genuinely suffered and won’t be able to pay out; others may use the crisis as an excuse to shore up reserves. So if you have some Covid-related savings, consider keeping some aside for a return to the usual expenses and for rainy days to come.
Invest
If you are in a position to hang on to new savings, think about where to put them. It won’t do much languishing on deposit, earning a near-zero return.
Say you’ve been lucky enough to squirrel away €5,000 since the start of lockdown, and you’d like to keep it on deposit with quick access. The most you can earn after a year is €7.50 in an Ireland State Savings account. With a Dirt charge of 35 per cent on that, you’ll have enough for a few ice creams.
If you have expensive short-term debt outstanding, like credit card debt, it makes sense to use savings to clear that first.
Recent falls in the market will have put the frighteners on pension-holders, but adding any spare cash to your pot is a good long-term play. "The falls have certainly been a setback but, in the long run, you can still expect your pension fund to grow," says Carol Brick of CWM Wealth Management.
While sitting tight can be difficult, it’s best to play a long game. “I firmly believe that by sticking with the markets for now and riding the storm, in the long term the rewards will be much greater than taking any drastic actions at this point.”
By continuing to save into your pension you are also taking advantage of generous government tax relief. For example, an employee who is aged 42 and earns €40,000 can get tax relief on annual pension contributions up to €10,000. If you employer offers a defined contribution scheme, talk to payroll about making an additional voluntary contribution (AVC).
“It is imperative of course, especially in these times, that your portfolio is diversified and is in a risk category suitable to your stage of life,” says Brick.
Households with young children may have saved most during lockdown. The average weekly cost of childcare in Dublin is €200 a week, according to not-for-profit company Pobal. With creches shut from March, families with one child may have saved around €3,200. If you don’t yet have a college fund for Junior, this money could get one started.
Investing in a well managed, long-term multi-asset fund while your child is still young can bring good returns. Of course, unlike a deposit account, your investment can go down as well as up in value, but the longer you invest, the longer time you have in hand to ride out fluctuations.
“Whilst every market crisis is different, so far all have eventually provided an opportunity to buy stocks very cheaply and make a profit over the long term and that time in my opinion is now,” says Brick.
You can also manage your risk. “Again, it is imperative especially in times like this that your portfolio is diversified and in a risk category suitable to your requirements,” she says.
Before signing up know the level of risk and predicted returns, how long your money will be tied up for, if you can access it, how charges and taxes will impact on returns and what happens to the investment if you die.
Relay race
Saving might be a good idea personally but, apart from following public health advice, the best thing we do to get our economy back on its feet is to spend. Neil Gibson of EY likens it to a relay race. “The Government ran the first leg, now we really need consumers to run the next leg to carry that baton on. The economy won’t grow if we all pause.”
It’s time to spend for Ireland.
The Government’s half-year exchequer numbers show that VAT receipts for the six months fell steeply, down €1.5 billion or 20.5 per cent on last year. Next month’s numbers may give us a sense of how things are trending.
If spending in your local shop, cafe, restaurant, bookshop, hardware shop, hotel or tourist attraction won’t break you, and you can do so safely, then do it. Not only are you rewarding yourself after a tough time, but you are supporting a local business, local wages and the economic recovery.
The income of 80 per cent of households did not fall due to the crisis, while 80 per cent of people have significantly reduced their net expenditure, according to Central Statistics figures. It’s no surprise people have saved.
“The economic message now has to be ‘spend where it is safe to do so’,” says Gibson. “You don’t want that vicious cycle where people don’t spend because they are nervous. Lack of confidence means lack of spending, meaning more jobs are lost.
“If your employment is relatively secure, spending is going to make you feel better and it’s going to be very important in driving economic recovery.”
Yes, it may mean booking in advance, queueing and distancing, but putting in that extra bit of effort will play a part in keeping that business open. Villages and towns need to see some of that money flowing again. If you can wisely and safely, do it.
