Does it pay to keep money on deposit?
Read any article on personal finance and the benefits of saving are likely to be front and centre. Emergency stash, rainy-day money, the runaway fund. Everyone has a name for it, but they all serve a similar purpose – to provide a more comfortable future and pull you out of a financial hole, if something unexpected crops up.
Is the return on savings still paying off?
In the past, savers seemed quite happy with a simple exchange. They’d put their money in the bank; the bank would use it to fund loans and the saver would be rewarded with an agreeable amount of interest in return. Everyone’s a winner.
But, with interest rates so low, savers might well be asking, ‘who benefits most when I put money in a savings deposit account?
The true cost of saving
A lump sum saver depositing €5,000 or more in an easy access account can expect to earn less than 1% interest in a year. It’s a similar story for a term deposit account, with no provider currently breaking the 1% mark, even for a five year commitment on the saver’s part.Source: Bonkers.ie as at 20/02/2018
Low interest rates are one thing, but if you happen to have an account that applies fees or charges, you could be missing out on earning potential and see your balance erode as a result of costs and inflation.
Time to consider an alternative?
Savers tend to have a few things in common.
- They want to keep their money safe
- They prefer to keep it at arm’s length, so they’re not tempted to spend it and
- They want it to grow
What’s interesting is, many investors feel exactly the same way. The biggest difference is that they’re willing to explore other avenues to achieve growth.
That doesn’t mean taking big risks either. The risk profile of investment funds varies just as widely as investor’s appetite for risk; it’s finding the sweet spot in the middle that’s key - allowing you to aim for reasonable gains, without taking on more risk than you’re comfortable with.
And remember, it doesn’t have to be an ‘either or’ scenario. You might decide to use a combination of saving and investment strategies to help get your finances to where you want them to be.
Could time and diversification work in your favour?
As a saver you might be used to setting money aside, sometimes for lengthy periods, for modest returns. It could be argued, that’s a similar strategy used by some low-risk investors, but they put a combination of time and diversification to work, in an effort to improve on saving deposit interest rates, without losing sleep.
Every investment comes with some risk, but with the help of good financial advice, it’s possible to find an investment plan that aligns well with your financial goals and allows you to invest for a length of time that feels comfortable.
Use change to gain fresh perspective
Change in any circumstance, even something like a bank account closing or a term deposit wrapping up, can be a timely reminder to check in on our financial plans and ask the experts whether your money is still in the best possible place to help you reach your goals.
Take the 90,000 RaboDirect customers, who need to rehouse up to €3 billion in deposits before May 2018, following the online bank’s announcement to leave Ireland.
How many will transfer their hard-earned savings into a low or zero interest savings account with their primary bank as a stop gap? And despite their best intentions, end up leaving it there earning little to nothing, long-term.
Savvy savers and investors use change as an opportunity to ensure their money has purpose, whether that’s building interest in a more financially rewarding savings account, adding to their pension or investing it.
The next step?
Find financial advice that reflects you and your needs.
Putting things on the long finger is unlikely to benefit your financial plans, so if you’re at a cross roads with your savings or thinking about investing as an alternative option:
- Keep momentum and talk to a financial adviser about your choices
- Stay focused and put your personal ambitions and financial goals at the heart of any decision-making
- Be clear about how you like to save or invest, think about whether you’re a lump sum kind of person, or if you find a drip-feed approach a more affordable way to go
- Ask yourself what’s most important to you and prioritise things like fees and charges, rates, performance and online access
- Think about investment providers, their financial security, the quality of their fund management teams, heritage, track record and customer service
No matter which side of the fence you land on, taking time to explore your saving and investment options and making an informed decision, is the most important first step.
Irish Life provide life insurance, pension and investment plans and recommend getting professional financial advice before making financial decisions.