Albert Einstein was a clever fellow. With gravitational waves all the rage this week it was his quotations that impressed me more. I dismissed his comment on income tax which he found “to be the hardest thing in the world to understand” but it was his statement on compounding that really took my attention..
“Compounding is mankind’s greatest invention as it allows the reliable, systematic accumulation of wealth”
So when it comes to saving and investing, we should remember both the effect of saving as well as the cause.
The emergency fund or Rainy Day Fund (RDF) is an essential part of your money management armoury. Your car breaks down, your bonus is cancelled or you simply want to buy that Merrion Square painting that you know will one day be worth a lot more. They are all part of the RDF and different to funding your retirement and long term planning. Any which way, you have to make your money work for you and avail of Einstein’s wise words on compounding.
There are 7 areas where you can make your money grow :
1. Deposit accounts – the very best of these at the time of going to press are either
- Long term savings… State Savings – 10 year National Solidarity Bond ( available through An Post offices or online ) offering 25% tax free – maximum investment is € 120,000 per person – on maturity equivalent to 3.83% gross per annum. You CAN withdraw on 7 days’ notice but you lose the accrued interest ON THAT AMOUNT – the balance continues on …
- Regular Saver accounts – the best is 3% ( net 1.77% after DIRT – Deposit Interest Retention Tax ) with Nationwide UK or EBS… sadly you are confined to minimum € 100 and maximum € 1000 PER MONTH ( no lump sums ) and with Nationwide UK it’s for 15 months and after that – they don’t allow you to continue.. it’s once only with them. EBS allow you to renew every 12 months…KBC Bank offer 2% BUT if you open their extra Current account with them, they will give 4% on their Regular Saver accounts.
Current best demand account up to € 50,000 is Rabodirect’s 1.25% ( net 0.7375% after DIRT tax ) .. over this amount it goes to 0.5% ( net 0.295% ) and if you do happen to have over € 5million, look forward to paying NO DIRT tax….because the rate is a whopping 0% !
So better in your pocket. No matter how small the deposit, ensure you are availing of the best rate possible and don’t let apathy, ignorance or lack of time preclude you from getting that rate.
2. Pension funds – I cannot stress enough how important it is to review your pension performance every year. Thanks to the Bull market since March 2009, most pensions have done well since. Only those advised to leave their money in cash funds or government bonds ( the cautious or “stable” funds ) will find out their pension has stagnated. If you want any kind of growth you MUST take some risk.
Sit down with your adviser and review your pension performance – that’s generally why you are paying a renewal fee to the adviser each year. If you know most pension funds have grown up to 10% last year and yours did not, ask the questions and look for answers.
Simply put, if you have 5 funds ranging from the least cautious (# 1 cash funds, government bonds ) to the most risky ( # 5.. emerging markets, BRIC countries, tech and energy stocks etc ) then don’t be surprised by choosing the # 1 fund that your pension has not grown during that year.
3. Diversification – they say you should nt put all your eggs in one basket and the reason ? You’re hoping the yoke’s not on you ! It makes sense to spread risk no matter what field of investment you are in…
- Property
- Cash
- Stock market
- Commodities
- Collectibles ( art, classic cars, rock n roll memorabilia, philately etc )
and within each sector, there should be a spread. e.g. cash on demand and on fixed terms for greater interest.
4. Stock market – The best possible return for ANY asset class over the medium to long term is the stockmarket. Many people are put off because they feel that this is risky but over the last 5, 10, 15, 20, 25 and 100 years it has produced a better return than bonds, property, gold or pretty much any other asset class you care to mention.
Just in Ireland alone, the ISEQ Index gained 962.2 points or 17.59% during the last 12 months from 5,471.52 points in February of 2015. Historically, the Ireland Stock Market Quotient (ISEQ) reached an all time high of 9981.08 in February of 2007 and a record low of 307.88 in February of 1983.
So do not be afraid of this asset, but be well advised to take professional advice. I am reminded of that irreverent definition of a stockbroker… someone who takes your money until it is all gone.
5. Discount and loyalty cards – the phrase every cent counts could not be more well stated when it comes to discount cards. I do cut out coupons, discount vouchers and have several loyalty cards for most of the supermarkets and petrol companies. Why ? Because I firmly believe it’s better in my back pocket than leaving it with the company I am buying from. I do ensure I am not overpaying for the service or product first – if you can buy cheaper at a competitor, it dissipates the loyalty factor.
You should be wary of credit cards too. Opening offers can be enticing – for example, spend € 1,000 in the first three months and we will give you free flights anywhere in Europe…. You may not have the wherewithal to repay that € 1,000 so think before you leap.
Pay your credit card on time ( last October, 51,000 cards exceeded their limit causing a fee of between € 7 and € 8.50 to be charged depending on the credit card company ) and try to avoid just paying the minimum each month ( it will take you 20 years to clear the balance – whatever it is ) Also avoid taking cash – you are charged interest from the day you take cash not from the time you receive your bill. Using the card in non-euro zones should also be a no-no as there are foreign exchange rates and charges payable for the privilege.
6. Invest in your home – just remember if you ever have to sell your home or downsize, there is NO capital gains tax (CGT). All the profit you make is yours to take. Tax free. Should you decide to move out and rent for a couple of years, if you sell then and make a profit, CGT is payable at that point.
Remember adding to your home, renovations, refurbishments all increase the value or at worst, make it more saleable.
The only reason for buying property now outside of your home is the hope of capital appreciation. With all the charges and taxes payable on rented property, you might wind up with half the annual rental income – has it been worth it ? If you have a good tenant, it’s a help.
Irish people still aspire to owning their own homes – and always will. Upgrading that aspiration will always pay in the end.
7. Invest in yourself – Napoleon Bonaparte once said Show me a family of readers, and I will show you the people who move the world. Bettering your circumstances will only come about from improving your skill sets. Generally this is through education. While knowledge is important, it’s behaviour that sets the standards. Even to fully understand the financial ways of the world, it takes time and patience. Even Oscar Wilde’s words have a ring of truth about them.. you can never be over-dressed or over-educated !