There are far better places for your savings than under your mattress

Savers remain undeterred. In tough times, we tend to hoard, and after a turbulent few years, household savings are at an all-time high of €143 billion. Considering the same households owe €102 billion, it’s a split that makes little sense.

Most people (who, fortunately, aren’t economists) don’t see a contradiction in holding dead savings and juggling debt with high interest rates.

This is done using the “rainy day” principle: as bad as things are today, they could be even worse tomorrow.

While it may make sense to pay off interest-bearing debt with cash that will be eaten up by inflation, most savers don’t let logic get in the way.

People like money under the mattress, at least metaphorically. If they think they need access to cash for a future purpose, they would rather hold it, even if it costs something, than forego it to pay off a loan.

In his latest book How to make your money worksays finance guru Eoin McGee that people can get too emotionally attached to savings and prefer to get the “instant gratification” that borrowing brings.

“$10,000 in savings earning 0.5 percent interest over five years equals $252 net. A loan of €10,000 over five years at 8 percent costs €2,165. In other words, the bank made €1,913 by lending you your own money!”

He adds it’s “amazing” when people become “addicted to the routine” of saving to the point that they borrow money for “wants instead of needs” instead of funding each other.

If you don’t learn to “hate” debt, it becomes a vicious cycle and the only beneficiaries are the banks, he says.

“The things we have in our lives aren’t actually connected to how we pay for them, and until we break that psychological connection, we will continue to borrow from the future to pay for today.” By separating the money from what we buy with it (he specifically cites a new car that becomes simply the “car” in a matter of months), we can make more rational debt management decisions.

“If you can’t get an interest rate on savings that’s double the interest rate on a loan, it makes sense to pay off the loan instead,” since most investment gains are subject to an exit tax of 41 percent.

So what makes more sense than hoarding cash? The answer is almost everything at the moment.

purpose it

Dividing savings into short-, medium-, and long-term goals separates savings from investments – entirely different assets.

Everything that is needed up to 5-7 years for a specific purpose – the holidays or next year’s school fees – should be kept in liquid instruments.

Financial planner Marc Westlake says federal savings are best.

“For some reason the government still pays interest, even though it costs them something to do it. It’s like a social contract. It’s small, but it’s there. Savings certificates can be canceled with a notice period of seven days. So if you don’t need the money, it’s tax-free and risk-free.”

See www.statesavings.ie for 3 to 10 year certificates and bonds. Anything longer than seven years can and should be invested.

“I prefer a sensible global, diversified portfolio. Bonds have taken a hit this year as 20+ year US Treasuries have fallen about 20 percent – the worst on record. Buying into long-term assets now means you’re more likely to have an embedded expected return,” concludes Mr. Westlake.

pay off debts

List your loans in order of the interest rate charged, not the amount owed. The credit card is the most insidious. You’d need a net return of 44 percent per year for it to make sense to hold on to your cash instead of paying off a credit card loan. Nothing offers that, so cashing out is a better use of your money.

Put it in an annuity

Free government money is never a bad idea. $10,000 into a pension plan means a higher taxpayer pays $4,000 less in taxes. Turning $6,000 into $10,000 is a 66 percent pre-investment growth, and it’s a breeze. The older you are, the more you can deposit. While someone under the age of 30 can contribute 15 percent of their salary, a 55-year-old can contribute 35 percent.

give it away

Logically, younger people have the most debt and vice versa. It is actually always the logical way to give away or lend savings from one generation to the next. Get a potential capital acquisition savings and “earn interest” at the borrowing rate, not the savings rate, advises Mr. Westlake. A small gift exemption of €3,000 per year to anyone is tax-free.

spend it

If it looks like rain and feels like rain, then today is the rainy day. Inflation is your enemy.

inflation

“As violent as a mugger, as frightening as a gunman and as deadly as a hitman.”

Former US President Ronald Reagan wasn’t describing a gunslinger from one of his cowboy westerns. He defined inflation.

When he landed in office, it was 12.5 percent. A figure of 2 percent per year is considered cautious as inflation feeds inflation and creates wage demands in the economy as money is spent faster than it is made and quickly spirals out of control.

Inflation is caused by too much money. Governments love to spend money even if (and especially if) it is borrowed at low interest rates for a long time because it becomes the next government’s problem.

Mr. Reagan cut utilities, cut Social Security, and lowered taxes until they went from 12.5 percent to just 4 percent. ‘Reaganomics’ works. Until it is no longer possible. In fact, the gap between rich and poor has widened. Today we have too much inflation. It’s largely energy based and of course money has been pumped into Ireland during and since the pandemic. Your money is worth less today than it was last year.

Hoarding money is a terrible idea, but hoarding things that are likely to become more expensive in the future is an indicator of earning interest on savings. “Theoretically, you could get a better return on an attic full of pasta and toilet paper than dumping it in landfill,” says Westlake. “Buying into long-term assets now means you’re more likely to have an embedded expected return, while speculating about the future price of pasta and toilet paper sounds risky.”