Is it time to get your money off deposit?Daniel Hardiman
Are we finally getting back to normal? It’s great to see people out and about again as the country eases itself out of lockdown. And for all of those retail businesses that were forced to close their doors, the early signs are good with the example of footfall on Grafton Street back to approx. 90% of the pre-pandemic levels.
This shouldn’t really be a big surprise to us though, as Irish household savings of €15bn during the period from March 2020 to February 2021 were more than twice the normal savings rate. Today Irish household savings now stand at a colossal figure of over €130bn.
This money is sitting in bank accounts, effectively earning nothing and in some cases actually costing money for the privilege of leaving it there.
So what are savers to do?
Now just might be the time to re-examine the approach you’re taking with your hard-earned nest egg and maybe take a look at alternative investments for your long-term savings.
Deposit accounts have their place
There’s no doubt that deposits always merit some consideration when building a portfolio.
Certainly for amounts up to €100,000, they are pretty much risk free. They also are extremely liquid, as you can walk into a bank, and if your money is in a demand account you can withdraw it all on the spot. Deposits also make a lot of sense if your investment horizon is very short.
But never forget about diversification
However there are also issues with deposits that cannot be ignored. Some savers simply put all of their money in the bank and leave it there. This may be a mistake for a number of reasons. First of all, this approach may not suit your appetite for risk and it completely undermines the merits of diversification. Depending on your investment timeframe and risk appetite, you may be better served by also considering other asset classes in order to achieve your investment objectives. Yes, there is very often merit in having some of your money on deposit, however it often makes more sense to have your money split between deposits and other asset classes.
…Or the impact of inflation
With the forecasts for inflation in Ireland in 2021 ranging from 0.7% to 1.6%, inflation is the silent killer for deposit holders. It is often overlooked especially when interest rates are low. However with interest rates at zero, any price inflation at all erodes the purchasing power of your savings. You’re effectively just becoming poorer.
It’s time for a plan
Nobody wants to see the purchasing power of their savings dwindle over time. On the other hand, you might be nervous about other asset classes and the risks attaching to them. It’s time for a plan…
This starts with understanding your saving / investment objectives, clarifying your time horizons for your savings and getting clear insights of your attitude to taking risk and your capacity to take some more risk. Once these factors are clearer, then we can see if you’ll be better served by considering alternatives.
So why is there €130bn on deposit?
There’s no easy answer to this one. In many cases, it’s down to inertia. Some people think moving their money into alternative investment vehicles is simply too much hassle. This inertia is costing them money. We also believe it is pretty misguided, as the process of getting investments in place is very straightforward, particularly now with the use of digital signatures etc.
For others, they just don’t want to take any risk. This may be because of underperforming investments in the past, or just wanting to know that you won’t lose money (except from inflation of course). Our belief is that this is fine if your time horizon is very short or your savings will enable you to achieve your goals in the future.
But gently challenging these assumptions can be illuminating. Our interest is in you having enough money to achieve your investment goals – what is the money actually for? And if your need to access the money is likely to be at least 5-10 years, maybe there’s a better way.
It certainly merits a conversation. We look forward to discussing whether having all of your money on deposit is the right approach for you.
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