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How much of your money should you be saving and investing?

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’. In these inflationary and challenging times, it is crucial to save if we can. John Lowe of MoneyDoctors.ie explains.

Saving comes naturally to some people and is extremely difficult for others, especially if you don’t have it. 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 – 10 per cent deposits seem an awful long way away for first time buyers.

How big should your savings pot be? Opinions differ. I would say outside of major capital needs, enough to support yourself and your dependents for between three and six months. So about three to six months’ (joint) net annual income in a Rainy Day Fund (RDF) where you can get your hands on them quickly – an accessible, on demand deposit account.

Current demand accounts attract an interest rate of 0.01 per cent (0.0067 per cent after DIRT tax). Remember with savings up to €100,000 per person per institution, you are covered by the Deposit Protection Scheme via the government via the taxpayer – you and me.

Deposit interest rates have hardly moved despite July’s 0.5 per cent ECB increase likely to be matched by this month’s 0.5 per cent (and could go higher). At some stage some of the deposit takers will increase deposit rates but don’t expect to get rich on it.

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 a decent return 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 – guaranteed by the government – deposit interest rate options, that’s if you want to stay in cash:

1. National Savings Certificate – three per cent tax free after five years – equivalent to 0.895 per cent pa gross each year

2. National Solidarity Bond – 10 per cent tax free after 10 years – equivalent to 1.43 per cent pa gross each year

The National Savings Bond offers a paltry 1 per cent tax free after three years (equivalent to 0.497 per cent 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 haven’t 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 which is only 109 days to go! (RSAs allow you to save between €100 and €1,000 per month allowing generally one withdrawal a year with paltry interest on offer).

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.

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. Between 1991 and 2020, the average stock market annual growth was 10.72 per cent. It is by far the best asset class of them all. As Warren Buffet once said, the stock market is a mechanism for transferring money from the impatient to the patient.

Just remember if you do want growth of any kind, you must be prepared to take a little risk but it can be measured and safe-guarded.

The majority of your money, say 90 per cent for most people, should be in relatively low-risk investments, such as the safer options in the stock market, property, pensions and bonds (government and public company IOUs).

There are now easy to operate, simple to understand investment vehicles where you can swap out of more aggressive funds into safer ones with a phone call and at no cost.

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!”

For more information click on John Lowe’s profile above or on his website.

The views expressed here are those of the author and do not represent or reflect the views.