Saving is hard - you don’t earn as much as you deserve, taxes take a big bite, and the cost of living is high. After all that, your savings only get measly returns in the bank. When you hear about stock market returns or get FOMO listening to the crypto people it makes you wonder if you should be doing more with your savings. Here are some suggestions on how to approach this situation…
Many people approach this scenario thinking of the returns they want. But a better way is often by considering the risk you can afford to take. If you’ll NEED your savings in the short term, and you’ll need ALL of them, then that dictates your risk tolerance (hint - it’s low!) and the suitable investment options. On the other hand, if you’re loaded and have no foreseeable need for cash, then you might be well suited to take more risk.
Aside - understanding and thinking about risk is an important topic and one we will delve into more in the future, but for now think of it as losing money when you can least afford to do so.
So let’s lay out some broad categories of investment, in order of increasing risk, that you might consider. There’s a lot of detail behind each of these, with many pro’s and con’s, but we’ll stay at a high level for today. Odds are you’ve heard about some of these, but perhaps not all:
Bank Savings.
We’re all familiar with these. Practically zero risk, but practically zero returns - even from savings accounts. Immediate accessibility is the main advantage but remember that the bank will subtract DIRT tax of 33% from whatever minimal interest rate they do offer.
State Savings - Savings Certs, Savings Bonds or Prize Bonds.
You may not have realised that when you buy State Savings Products you are actually lending to the Irish State. These also have practically zero risk but the returns are slightly better than you’ll get from a bank (from 0.33% - 1.00% per year at present) and you won’t pay DIRT tax on the interest. While your money can be tied up for a few years, it can usually be accessed immediately if you forego the return.
Structured Products or Funds.
This is a broad range of investment products, and refers to when professional money managers gather money from many people and use it to invest in what they hope will be profitable investments. These can range from very low to very high risk, and may invest in things like stocks, bonds, currencies, property or even gold! You’ll often need a decent chunk to get started, though you will usually be able to withdraw your money at any time (but check the details). A common feature is that of being managed professionally, which can be reassuring, though will never be a guarantee not to lose money. Check the likes of Irish Life, Zurich or Davy for more options.
Property.
It’s hard to know where to classify property on the risk spectrum since there are many ways of investing with different levels of risk - e.g. owning a own family home to speculative buy-to-let investment. While long-term returns from property have been good, it nevertheless has major downsides - volatile in the short term, usually needs big chunks of cash (and often debt) to invest, hard to sell quickly and can cost a lot in running costs. If you’re looking to invest a more ‘modest’ amount, REIT’s are an easy but often overlooked way to get some property exposure with the prospect of regular dividends as well as potential to share in rising (or falling) property prices. But beware that many novice investors fixate on property (because its ‘tangible’ and something everyone thinks they understand) when other investments may actually be better suited to their circumstances.
Individually Selected Investments.
This is what most people think of when they think ‘investments’, and there’s an enormous range of options. This could include individual stocks, or ‘baskets’ of stocks via an index fund or ETF, or a multitude of other assets. The long-term returns from stocks have been high but the risks are also high - expect a roller-coaster in the short and medium term. That being said, there are lower risk options that might pay a dividend and higher risk speculative stocks, with literally everything in between. We could dedicate many posts to this subject but in general it’s an area to be very careful of if you don’t really REALLY know what you’re doing.
Speculative Investments.
Finally, I’ve reserved this special category for basically ‘everything else’ - bitcoin and other crypto assets, your friend’s next business idea and all manner of other schemes. While crypto is its own rabbit hole, it goes without saying that everything in this category is very high risk and should only be a (small?) part of your investment activity.
So while this list may have not quite answered your question about what to do with your savings, hopefully it has broadened your mind on the range and risk profile of options out there. I plan to delve into greater detail on these topics in the future - so please tweet/DM with any specific questions you’d like addressed.
But remember also that for many people, one of the best ways to invest surplus savings for the long-term will be via your pension - see why with our post on Pension Tax Break Explained. It’s also wise to keep a cool head when making investment decisions, particularly to resist chasing returns whose risk you may not fully understand - as banking legend JP Morgan once said - “Nothing so undermines your financial judgement as the sight of your neighbour getting rich.”