How to save on your savings
With the banks now introducing negative interest rates, we could be losing money we're depositing, rather than increasing it, says Sinead Ryan. Here are tips on saving the smart way
There's a new financial term we may all need to get used to, as if there weren't enough already: Negative Interest Rates. Now if that immediately causes your brow to furrow, it should. Indeed, it should also raise the hairs on the back of your neck and bring you out in a cold sweat.
Up until now, you've had your money in a bank deposit account. Safe as houses, we used to say; but now at least as safe as the bank guarantee. At the very least, amid paltry returns, you'd get your cash back when you went looking for it. But the deposit landscape is changing and very quietly, scooting under the wire, Bank of Ireland announced last month that it was going to start charging customers to mind their money.
Now, it won't affect the vast majority of us initially, as the charge (negative interest of 0.1pc) will only apply to the big savers; accounts with over €10m in them. Phew. So that's okay then? Well maybe not.
Across Europe countries have slowly introduced similar policies. In Sweden, Switzerland and Denmark banks are charging savers. In Japan, they've been doing it since last year. It means that, for example, if you deposit €10,000 today, you might get back less than that in a year's time.
The reason is the flat-lining of inflation. Supposed to be kept at 2pc by the European Central Bank (and this is its only job, folks), it is instead languishing at 0.2pc with no uplift in the foreseeable future.
Usual emergency measures like quantitative easing (printing more money) and dropping interest rates to zero to encourage borrowing haven't worked, so desperate measures are called for.
So the ECB started the ball rolling itself by charging banks (including Bank of Ireland and AIB) 0.4pc to mind its (our) money on deposit overnight. It's part punishment as they don't want the money. They want banks to get it out to borrowers, but people aren't borrowing as much as they should, so it becomes a vicious cycle.
What's a poor banker to do? Well, they do what they always do, and pass along the fee. It's only a matter of time.
So, in a reverse of fortune, the lender pays the borrower. Sounds crazy? Well, given the tumultuous few years we've had, the rollercoaster isn't over yet.
The Irish are great savers, make no mistake. There is around €100billion on deposit in our banks, post offices and other state instruments like prize bonds. That's ordinary household savings, not corporations or companies. We save more than most people. But in recession, people are afraid to spend it, so they hang onto it in case the rainiest of days hasn't yet arrived - and who's to blame us?
Well, Michael Noonan for one. You're being punished for your prudence. DIRT is charged at a whopping 41pc on any interest you do make and your current account is being hammered for fees also. You'd need to have more than €10,000 on deposit at 3pc to make up the annual charges on an average current account.
So, what can you do with your cash? Here are some ideas.
Firstly, decide on your 'risk profile'. Are you a saver or a spender? Do you need the money for something in the future you can't do without, like your children's education, or a new car? Or is it just there for a rainy day? Are you saving because it's a good thing to do, rather than for something specific? Are you prepared to take a risk with it, and if so, how much are you prepared to lose if it goes wrong?
Answering these questions is vital before you take it off deposit and use it for something else. As with any financial decisions, it's imperative to get independent financial advice first, preferably from a fee-based broker who is unbiased.
State Savings: Loaning your money to the Government is a good idea, even though they already take so much via your tax. The National Treasury Management Agency (NTMA) offers bonds, certs and savings products with no DIRT tax. However, you'll have to leave it there for three to 10 years. See statesavings.ie for current rates, but a five-year cert returns 5pc (0.98pc p.a.).
Pay off debt: There's little point in having a credit card racking up interest at 20pc or a term loan at 14pc while your savings are earning nothing. Put the two together, pay off the card and cut it up! Relieving yourself of high-interest debt improves your credit rating too.
Put it in a pension: Pensions are the most tax-efficient vehicle around. You get full tax relief (20/40pc) on what you put in, which grows in a tax-free fund. However, the catch is you can't get it until retirement. Talk to a broker about your options.
Give it away: You can gift up to €3,000 p.a. to anyone without them having to pay tax on it, under the Small Gifts Exemption relief. Children, grandchildren, nieces and nephews all count, and you can disperse your money before your Will passes it on.
Investments: Investment vehicles such as unit-linked funds or equities are sold through insurance companies or stock brokers. There is always a risk attaching to them, although in many cases, they can out-perform cash over the longer term. You should always consider returns over a 10-year period, though and get specialist advice before buying.
Gold: Gold used to be a safe haven; somewhere that money was locked in during times of economic strife. Although many institutional investors head here in a currency storm, it's not for the faint-hearted. It can be bought in certs, or physically (i.e. it's kept in a vault). While gold prices increased by up to 20pc in the first half of this year due to market uncertainty, they can be extremely volatile. Sentiment is muted for the rest of the year with sluggish returns expected. If the risk is too much for you, buy a nice pair of gold earrings instead.
Crowdfunding: Lending money to small business start-ups is a great way of keeping it in the economy. Online funding sites like LinkedFinance.ie allow you to select sectors and invest as little as €50 a time to vetted businesses. Returns are 8pc to 15pc p.a. but are not guaranteed. Repayments are made to your account monthly.
Tips for deposits
• If you are keeping your cash on deposit at least shop around for decent rates. Banks generally offer their best rates to regular (monthly) savers from €100-€1,000. They prefer this business to lump sum deposits, so if you have a lump sum, consider 'stripping' it off into a higher interest bearing savings account.
• Some banks insist you leave the money there; others offer instant access. Always ask, as it can affect the interest rate offered.
• Always keep an 'emergency fund' liquid (usually a few months' salary if you can). Buy Irish goods or services and you're helping the economy.
• Have several deposit accounts (they are free to set up) and name them for specific things, e.g. 'Next Summer's Holiday' or 'New Car'. That way, you'll have to make a conscious decision to swap money from one to the other, which is harder to do when you also have to decide what to delay in order to buy a new pair of shoes, for instance.
Finally, consider spending it. Even without negative interest rates, inflation and terrible interest rates mean that you're losing money anyway. You may as well enjoy it if it's not ear-marked for anything in particular. Eat out or go on a staycation; the reduced 9pc VAT rate means it's costing less.