Putting a little something aside every month is always a good idea but it is not as straightforward as just putting money into the first deposit account that comes to hand. Many of us are keeping money for our short, medium and long-term requirements in the same place and the failure to segregate those savings pots is costing us.
As a nation, we are great at saving, but we do so inefficiently. Irish households had a whopping €159 billion on deposit at the end of October, according to Central Bank figures, but we’re keeping almost nine in 10 of those euro in instant access current and demand deposit accounts, earning little or nothing in interest.
Are your savings for this year’s holiday mixed in with savings earmarked for a home purchase in three years’ time? Maybe that account has your emergency fund in case you lose your job, and money for the broken boiler too. A college fund for kids? There’s possibly a bit for that in there, too.
When you don’t segregate your savings, the pot grows all right but in a linear way simply as a result of you adding to it. But you’re missing out on other growth. You lose out on higher interest, your money is being depleted by inflation and there is the opportunity cost that comes from not investing it over the long term.
By allocating your funds to short, medium and long-term goals, you can use the right financial tools for each pot, ensuring your money works harder for you.
Short-term savings
Short-term savings are for things that are likely to occur over the next one to three years, like a holiday or changing your car, says Nick Charalambous, financial adviser at Alpha Wealth. Perhaps you allocate some of your earnings each month into an account designed to make these expenses easier to manage.
You might think of it as your “emergency” fund, but these things aren’t emergencies, he says. “These are things you might know or expect will happen. If you are thinking of changing your car next year, you try to have money in the bank for that.”
If you are lucky to have money left over at the end of the month, don’t keep it as a slush fund in your current account, Charalambous advises. You are more likely to overspend, and you are missing out on interest.
With inflation at about 2 per cent, put these short-term savings in an account that is paying at least 2 per cent interest, says Charalambous. “Regular monthly savers can still get 3 per cent on a 12-month fixed rate with Bank of Ireland or AIB,” he says. “Don’t let your money sit in low-interest accounts.”
If you have “legacy” money – a lump sum already saved for short-term goals sitting in a low-interest bank account or credit union – consider online banks such as Revolut, Bunq or Trade Republic, he says. They are regulated in the EU and provide instant access savings accounts at somewhere around 3 per cent, he says.
You’ll get a return of 3.36 per cent with Dutch online bank Bunq. You can start with a lump sum or make regular deposits, though regular deposits aren’t required. And you can make two withdrawals a month at one day’s notice.
“Lock in fixed-term deposit rates now before they drop further in 2025,” says Charalambous. “It’s all about trying to get that little bit more for your money by putting it into different compartments.”
Bank of Ireland has this week cut the rate it is offering savers for the first time since the European Central Bank started lowering interest rates last June, reducing the interest rate on its 12- and 18-month fixed-term deposits by a quarter of a percentage point from Friday.
Keeping the amount of money we do in current accounts and on instant access doesn’t stack up, says Ralph Benson, head of financial advice at Moneycube.
“There probably aren’t going to be too many unexpected costs that are going to amount to more than €2,000 that are suddenly sprung on you,” says Benson. “They are quite quantifiable and you do need cash for them, but you’d be very unlucky if your boiler broke at the same time as your holiday had to be paid off and your car replaced.”
Holding six months of after-tax income on standby in case you lose your job? Those in secure, public sector jobs probably don’t need to, he says.
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Medium term
Your medium-term savings pot is for goals in the next four to 10 years, says Charalambous. These could be things such as a house deposit, a home retrofit, children’s education or maybe that holiday of a lifetime.
Putting money for these things outside the traditional banks is an opportunity to get a bigger return over that time period, he says. He recommends exploring savings products from the likes of Zurich, Aviva and Irish Life.
An investment time frame of five years-plus is recommended and providers estimate annualised returns of 6-7 per cent a year. The minimum monthly savings amount tends to be €100, but you can save more. You can also start with a lump sum.
Fees for the same product can vary widely by broker and can eat into your returns, so shop around and get the fees in writing. The allocation rate is the percentage of your money left that is invested after the charges have been taken out of it.
“Ask if there is an entry cost,” says Charalambous. “If you are putting in €100 a month, or a lump sum of €1,000 or more, how much of that money is actually going into the savings account. The ideal is to get all of that invested, that’s called the allocation rate.”
The Government charges a 1 per cent levy on these savings products. Ask if this is covered by the broker, he says, “Even if you have all of your money allocated and the Government takes 1 per cent, you’ve already lost 1 per cent of your investment contribution. That can be covered by the broker because they get paid relatively attractive fees [for selling] these products.”
Compare broker management charges too, he says. “As a general rule of thumb for me, you should be looking at a management charge of about 1 per cent per annum for a lump-sum investment. For monthly contributions where you pay in €100 a month, for example, it would be about 1.25 per cent.”
It can be as much as 1.5 per cent or 2 per cent. “That may sound small, but extrapolated over time as the fund grows – and it’s on the value of the fund, not of the contribution, and it’s taken daily – it can amount to a very big difference,” he says.
Their personality might be risk averse and their capacity for loss might be quite low, which would lead me to the middle of the road, so perhaps 60% in equities and 40% in a high yielding bond
— Ralph Benson, head of financial advice at Moneycube
At the moment you will pay 41 per cent tax on any gains when you exit the investment. This may reduce to 33 per cent at some point in the future in light of a recent Department of Finance review.
If you are saving for a house with a three- to five-year time frame in mind, you don’t want too much drama, says Benson.
“You want an element of growth to keep the value of your money and hopefully get some investment growth above that, but it needs to be in a balanced way.”
You could invest online yourself or pay for advice on investing some of your savings in a mix of equities, bonds and property, he says. “You might incur some investment cost for taking advice to access the stock market, but you might also decide to keep 50 per cent of that money in cash and look at that as a balanced portfolio,” he says.
When advising clients, he will talk to them about their investment timescale, their attitude to risk and their capacity for loss.
“Three to five years is quite short. Their personality might be risk averse and their capacity for loss might be quite low, which would lead me to the middle of the road, so perhaps 60 per cent in equities and 40 per cent in a high yielding bond,” says Benson.
Using a State savings product to save for your children’s college fund over 20 years doesn’t pay, cautions Benson. “It’s terrible to see people putting money in State savings over 20 years. There is almost no 20-year period over the last 1½ centuries where cash would have delivered a better return than almost anything else.”
“That time frame is ideal for putting it into something like an equity index fund with the added thought that you can put that into a trust and be siphoning off money for each child over a long period.” This helps with tax planning.
Long term
The big long-term goal is to have income when you stop working and contributing regularly to pension can furnish this.
“The government wants you to do it; that’s why pensions are the most tax attractive investment vehicle in Ireland,” says Benson.
There is tax relief of up to 40 per cent on contributions, and small contributions now can grow significantly over time, thanks to compound interest. Your savings are certainly better off diverted to a pension than sitting unused in a current or deposit account.
If your employer offers a matching contributions scheme, join it to benefit from essentially free money.
Pension savings need active management, however. “Many people think, My employer pays 5 per cent, I pay 5 per cent, that’s as much as I can do, but that’s not the case,” says Charalambous. You can make significant additional contributions to your pension and get generous tax back in line with your age.
“If you are in your 30s, you can get tax relief on 20 per cent of your earnings; in your 40s, it’s 25 per cent.
If you are in your 30s earning €50,000, a contribution of 20 per cent of your salary is €10,000, which sounds an impractical amount. “The key thing is that the tax man gives you back €4,000 of that €10,000, so your net cost for that €10,000 is €6,000. That’s €500 a month, which seems a bit more reasonable, says Charalambous.
Pension payments can be stopped or reduced over time, so you are not tied into contributing a set amount forever, but should do so as regularly as you can. And unlike insurance company savings products, pension savings have the added benefit of growing tax-free.
“If it’s money you have in the bank that you don’t require for the short term, make that one-off pension contribution, or make additional monthly payments even for a short period,” says Charalambous. “That’s going to give you the ability to essentially retire early. Make hay while you can.”
And don’t just tick the “default” investment box. Pay attention to how your pension is invested too, or get someone to advise you. “Have an annual pension review, try to set out a roadmap to retirement and plan how you are going to meet that,” says Charalambous.
“Pension is the vehicle that is certainly going to make you the most money because of the tax treatment,” says Benson of Moneycube. “But equally, you have got to eat in the short term and keep the show on the road until you hit 65 or 66.
“It’s about doing the right things in a gradual way over time. Having good financial habits, that’s how people meet their goals.”
