Saving used to be simple – find the best rate and lodge your cash. But with the economy in turmoil, finding a safe place for your money is the priority
TEN YEARS AGO, some of us couldn’t spend our money fast enough and nothing was too ridiculous for us to buy. So careless were we with our money, that the then minister for finance Charlie McCreevy had to incentivise us to save with the SSIA scheme. It’s all different now and people are increasingly reluctant to spend anything at all.
Today, €12 of every €100 of disposable income is being used to pay off debt or to build up savings, but with inflation climbing and concerns about the future of the Irish banking system rumbling on, how much money do people need to be saving and how can they keep it safe?
HOW MUCH RAINY DAY MONEY DO I NEED?
That depends on how long you think the rainy day will last. Conventional wisdom has it that you should have savings of anywhere between three and six months of monthly expenditure. That, of course, is easier said than done. If your monthly outgoings come to €5,000, when you tot up your mortgage, childcare, car loan, insurance, bills, food and entertainment (if you can afford such frippery), you will need a lump-sum of at least €15,000 to cover you for three months. If you save €200 a month, it will take almost seven years to get into your comfort zone.
Financial advisor Brendan Burgess believes that the importance of rainy day money is often overstated and people in (relatively) secure jobs should focus first on clearing their liabilities. He points out that in the event of real emergencies, most people would be able to fall back on overdrafts and, if they were very stuck, credit cards.
SO, IF I HAVE SPARE CASH I’M BETTER OFF PAYING MY DEBTS?
It depends. Credit card debt should always be the first to be cleared as it attracts a vicious rate of interest. You should pay off any term loans too, as they almost certainly cost more than your savings will earn. If you have a loan of €1,000 and pay 10 per cent interest, you pay around €100 a year. Investing the same sum, meanwhile, will only net you around €30 in interest once Dirt is factored in.
The exception may be your mortgage if you are one of the 60 per cent of mortgage holders on a tracker. While paying €1,000 off your home loan may save you just €25 a year in interest payments, Burgess believes it has merit. “Your money is absolutely safe when you use it to pay off your mortgage,” he says. “Once it has gone to clearing any loan, it cannot be taken from you or you can’t lose it.”
INFLATION IS HIGHER THAN DEPOSIT RATES, SO IS THERE ANY POINT IN SAVING?
The rate of return offered by most deposit accounts is not enough to combat the rising cost of living. Inflation hit 3.2 per cent for the year to April, so banks would need to offer interest deposit rates of nearly 4.5 per cent (allowing for Dirt) to give savers a net return, and for short and mid-term deposit accounts, and no bank does it. To actually fight inflation, investing in the equity markets is the better option but that is not for everyone and certainly not without risks.
WHERE CAN I GET THE BEST RATE OF RETURN ON MY SAVINGS?
Government bonds offer better returns than most banks. A three-year government bond earns 10 per cent tax-free. This works out at an annual equivalent rate (AER) of 3.23 per cent. This is still only marginally ahead of inflation but the investment is free of the 27 per cent Dirt so a bank would need to offer a gross rate of
4.42 per cent on a 12-month savings product to match it. The 10-year National Solidarity Bond offers a gross return of 50 per cent, including 10 annual payments of one per cent. An Post savings certificates offer a 21 per cent return, equivalent to 3.53 per cent AER, or 4.82 per cent gross if you factor in Dirt.
There is, however, a but and a pretty big one too.
Even 10 years ago, the notion that Irish government bonds were risky would have been unthinkable, today, they should probably be viewed more like an equity. “The markets have been saying for a long time that they expect Irish bonds to be restructured. I don’t think that will happen but it is certainly a risk so they should form part of a portfolio but by no means all of it,” Burgess says.
If you spent €100 on bonds, you may still get the rate of return promised, but in the event of a significant restructuring, the Government might say it was only giving back 60 cent in the euro when you cash them in.
And wouldn’t it be typical that the only bond-holders to get burned by the State would be the citizens who invested in them?
BANK DEPOSITS ARE STILL SAFE RIGHT?
The Government guarantee still stands but it would not amount to much if the State went bust.
“The cost of the bail-out and the continuing state of the public finances mean the guarantee has lost its value,” says Burgess. The European Central Bank has also backed Irish banks and it seems unlikely they will pull the plug, so hold off on racing to the ATM for a bit. With that in mind, there are still some reasonable savings offers out there. The EBS offers savers with a minimum of €20,000 a fixed rate of 3.7 per cent over 12 months. Once Dirt is stripped out, that €20,000 will yield €541.68 over the term.
The same building society’s Family Savings account offers 4 per cent AER for the first year. Bank of Ireland has a “double your interest” product offering 3 per cent for a one-year fixed term, but that interest rate doubles to 6 per cent AER fixed, if customers opt to save for a second, one-year term. Account holders can withdraw some savings at the end of year one. The minimum single lodgement is €20,000.
IS THE RATE OF RETURN THE ONLY THING I SHOULD FOCUS ON? Saving was once very simple. You looked for the bank offering the highest interest and the easiest access to funds and you went with that. According to Helen Cahill of irishdeposits.ie, the single biggest thing occupying the minds of would-be savers now is security.
More and more people are looking at what the credit agencies are saying about the banks where they are considering depositing their money.
“People are asking how they can spread their risk more than they are asking about a rate of return,” she says.
WHAT WOULD HAPPEN TO MY SAVINGS IF THE STATE DEFAULTED AND LEFT THE EURO ZONE?
No one actually knows but it would not be pretty. While economists argue over the details, a 50 per cent devaluation of our currency – whatever it may be – would be likely. When Argentina defaulted, the value of its peso fell by 70 per cent almost overnight. Inflation would spike and the value of any money on deposit would be eroded, if you could get at it. If your mortgage was in euro – which it probably would be – you might find it doubling in the new currency. The apocalyptic scenario is, however, not on the horizon just yet.
WHAT ABOUT DEPOSITING MONEY IN FOREIGN-OWNED BANKS?
It’s certainly an idea worth considering. While the rating agencies are looking down their noses at Ireland’s financial institutions, they appear to love Rabobank and its triple-A rated status. It also has a Dutch government guarantee.
Ulster Bank would almost certainly have the backing of the British government if everything went pear-shaped, while NIB is owned by Danska Bank.
According to Cahill, a growing number of investors are keen to take their money out of Ireland and open accounts in banks which do business here but have their headquarters elsewhere. She says other “more sophisticated investors” are depositing money outside of the euro zone and opening accounts in the UK, Switzerland or Norway. The easiest option for a casual saver would probably be to travel to Newry and open a sterling account there. Although, again, that is not without its risks and sterling could also get into trouble.
The bottom line is, you can’t protect your savings entirely. The best you can do is spread the risk as wide as possible so that even if the euro goes to the wall, you have some degree of protection.
“It’s probably a good idea to have some assets in foreign currencies,” Burgess says, “but there is no risk-free place for your savings or investments. You could open a bank account in sterling or some other foreign currency, but this is not risk-free. Sterling could fall in value against the euro.
He says buying shares directly in American or British companies or Irish companies with significant earnings in foreign currencies is another option “but then you are exposed to the risks of the stockmarket. You could buy gold, but this is very risky as many people believe that gold is in a bubble stage so there is a risk of a significant fall.”
