Deposit or invest? What to do with your money

Someone said to me during the week that it was not a good time to have money on deposit because interest rates were so low.

Someone said to me during the week that it was not a good time to have money on deposit because interest rates were so low.

I suspect the reason they made this comment was following An Post’s announcement to reduce their rates even further on their Bond and Certificate accounts recently and this was, to be honest a bit of an understatement, because it is in fact a terrible time to have money on deposit particularly if you are dependent on getting an income from your savings to help supplement an old age pension for example.

You see financial institutions don’t have to lure savers with attractive rates anymore, when they can borrow money themselves on the cheap.

Which is why we are now seeing rates as low as 0.1% on many accounts. And when you factor in inflation and DIRT tax, for hundreds of thousands of people it is actually costing them money to have it on deposit.

If we rewind less than 12 months ago, and you went into your local An Post, you could secure a three year fixed, tax free rate of 10%.

So, if you invested €10,000 then you would get back €1,000 in interest 3 years later - happy days. Now, if that same €10,000 was invested, with the rate being just 4%, the interest earned therefore would amount to only €400. That is a 60% drop in what the rate previously was. By any account, that is a massive drop.

So what options are open to people who have money on deposit, but are unhappy with their current rate of return? And when I refer to options, I mean real options, not investing in fine art, wine, precious metals etc. so I am going to put forth some options that people can actually take action on themselves.

The first option is for those who happen to have a mortgage. And if you are, like a gentleman I met last week who had a variable rate mortgage where he was paying 4.5% and had 9 years left on his mortgage.

If he continued paying this mortgage he would have paid €20,096 in interest back to his lender. However, if he used €30,000 of his savings and took it off his mortgage, the amount in interest he would have saved is €7,236. The test to make sure he was doing the right thing was to see what he would have got for this money on deposit over the same term. And the answer was about €3,900. So, this really was a case where he should use some of his savings to clear part of his mortgage.

The second option is to do nothing, sit tight and hope rates increase in the next 12 to 18 months.

Yes you might be earning very little in the interim but you don’t want to commit and lock your money away for 5 years or more just to get a decent annual rate, which, could turn out to be very poor if, and when rates increase.

Another option is to invest in products that carry an element of risk. You have probably heard of the old saying “the higher the risk the higher your return” and in some cases this can be the case.

But you are risking your money and how would that feel if half or all of it was wiped out in the chase to get a better return. Is it worth the risk? Only you will know, but only ever risk what you can afford to lose, not, what you can’t.

Investing in shares/managed funds has a “doubled edged sword” – you can make lots of money if successful but equally you could lose it all if you are not.

How would you feel if for example you saved €5,000 over say a five year period, it’s your life savings, it was hard but you managed to save it. You then use this money to buy shares with the full amount and a few months later it is now worth €250.

You would obviously feel sick. It took you a long time to save this amount and then literally overnight it is wiped out. So, don’t invest in shares unless you can afford to take the lows with the highs.

Having said that, you can invest in accounts that have 100% capital guarantees that allow you to invest in the Stock Market as well, so you benefit when the stock market increases and you are protected if the market drops i.e. you are guaranteed to get your capital back. And this is my third option.

I personally really like these types of accounts as they are typically structured in such a way that part of your money (somewhere between 20% and 25%) is returned to you after 12 months where it earns a fixed rate return of up to 10% and in some cases even more, and the remaining amount is invested in a variety of stocks and shares.

But if the stock market crashed, you are protected and you get your capital back so the only risk you have is you get back what you invested in that part of the account.

When you look at the risk/reward strategy of investing in this type of account against investing in current fixed rate products, it just shows you how good these types of accounts really are and just how bad the others are.

Why leave your money on deposit when you could use it to pay off debt. And this is my fourth reason for money on deposit earning nothing. Again, let me give you a real life example of a client of mine who owed €20,000 on her credit card, yes that’s right, €20 big ones.

To cut a long story short – interest on credit card debt would be €17,244, if she invested the €20,000 she would have earned about €5,000, so it just didn’t make sense to leave it earning 2% when her debt was costing her 18%.

The big proviso however, was that she was not using all of her savings, she still had some “rainy day” money even after clearing her debt and that is important, don’t use all of your money on deposit to clear your loans, leave some because, it will rain at some stage.