What is the safest way to save cash?
As protests and politics continue to threaten the future of the single currency, savers want to know if they should be putting euro away for the long-term or planning a quick exit, says John Cradden
IT IS usually a good sign of healthy finances that you are in a position to put away a lump sum or save regularly.
But the uncertainty over the future of the euro in 2012 may be making the task of choosing the best home for your money a bit more challenging.
Should you stick with deposit accounts with instant access to your cash in case things go pear-shaped with the euro? Or should you take a deep breath and lock your money away in a long-term fixed-rate or investment product and hope the euro pulls through?
To put it more simply: should you go long-term or short-term with your savings?
For many, the choice is very straightforward.
"Until this euro crisis plays out, investors are reluctant to go long-term on their savings," says Bob Quinn, of Kildare-based financial advisers, Money Adviser.
Deposit accounts will be the natural home for those of a nervous disposition.
Liam Ferguson, of Ferguson and Associates, says: "In my view, savings should be accumulated in a deposit account unless you are prepared to leave your money for the long term and be flexible about when you need access."
Looking on the positive side, if you are still happy to keep your money in our weakened banking system, you can benefit from deposit interest rates on offer that are very high compared to the real interest rate market as the banks here fight over an ever-decreasing pot of deposit money available.
The advice to seek out the deposit product with the highest interest rate has always been a bit of a no-brainer, but today it may be a necessity to ensure that the value of your savings does not actually fall in real terms over time given rising inflation and the now higher rate of DIRT.
"With every financial process, you need a starting point or benchmark," says Peter Tompkins, of financial coaching firm My Financial Window. He calculates that with inflation at 2.9pc (as it was in November) and the rate of DIRT now at 30pc, you would need a savings product with an interest rate of at least 4.15pc just to stand still.
It works out at a net return of just over 0.005pc.
"It's not the greatest return on your hard-earned savings, but at least it allows your money to retain its value and purchasing power," Mr Tompkins says.
Going by this advice, you should probably think about locking your lump sums away for at least 12 months, as the best available rate on instant-access deposit accounts is 3.25pc at both AIB and Northern Rock, followed by 3pc at Nationwide. The best one-year fixed deposit interest rates range from 3.77pc at Permanent TSB to AIB at 4.1pc.
Still at least 0.5pc off Mr Tompkin's suggested target rate of 4.15pc, of course, but still far better than having your money resting in an account offering anything less than 3pc, or worse still, a current account earning zero interest.
Regular saver accounts, where you can put by up to €1,000 a month, are also still very competitive, with most banks and building societies here pinning their rates around the 4pc mark.
If you have a small lump sum of less than €10,000 but still need instant access, you could set up a standing order to deposit it into a regular saver account at the maximum allowable amount per month until it is fully deposited.
"Regular saver accounts are the foundation of any savings plan as well as good cash management," says Mr Tompkins. "Get the best rate of interest on your savings and make them work harder for you."
If you are happy to climb a little higher up the risk ladder from the (relative) safety of deposit accounts, there is more choice.
A popular option in the past has been a tracker fund, but most funds are usually for a fixed term of at least three years and usually more, although the initial investment is usually guaranteed.
Given the current reluctance of many ordinary investors to lock-in for the long term, these have fallen out of favour, says Mr Quinn. "Because of the term involved, trackers are typically a turn off." He suggests looking regular saver-type investment products that can also accept lump sums and offer a range of risk profiles, and which don't have a typical time frame. More products like this are due to be launched early in 2012, he says. Having said that, a degree of flexibility about when you need your cash is a good thing.
"If you intend cashing out in six months' time to buy a house or change the car, the funds you have invested in may be going through a bad time," says Mr Quinn. Being willing to take a long-term view, as well as being flexible about access, will undoubtedly open up options for savers with a higher tolerance for risk. Mr Ferguson suggests a diversified investment portfolio. "I'd suggest a mix of sovereign and corporate bonds with a minority equity component. I'd favour high-yield equity funds, which provide the added security that the fund should make money from dividend yields, even if the share prices are static."
Irish Independent Supplement