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Pay down debt? Invest? Splurge? Seven ways to use Covid-19 savings

Smart Money: Savings are at record levels – if you are lucky to have some, what are your options ?

The latest figures show that Irish people have saved an additional €15 billion over the past year. That is about €9,400 per household, on average.

But of course there is a massive variation around the average – the finances of many households and business owners have been hit hard and savings decimated, while many others have earned the same, or more, but have had less opportunity to spend it.

In some case the amounts in savings won't be large. But based on the average, it is clear some will have saved significant amounts, perhaps an additional €15,000 to €20,000. Central Bank research has estimated that higher income households, a group less susceptible to the economic hit, have saved proportionately more.

If you are one of the luckier ones, what should you be doing with your cash? And how will the decisions you make affect the economy?


1. Spend it!

If spending does pick up as the economy reopens – fuelled from deposit accounts – then it will boost growth and help those who have lost their jobs.

Will this happen? Martina Lawless, research professor at the ESRI, believes the savings should fuel “a strong boost in consumer spending as restrictions are lifted”.

However, she adds that she does not believe people will spend it all in a rush. The Central Bank research also cautioned that experience suggests better-off households are more likely to hold on to a significant portion of extra savings.

The main constraint consumers have faced, Lawless said, has been on spending on services – like restaurants, holidays, nights out and so on. People will return to spend in these areas when they can, she said, but the scope to “ catch up” on spending lost may be limited.

“Will you really go out and eat on a Tuesday as well as at the weekend?”

Also, restrictions are likely to lift gradually, likely limiting the ability to spend in some areas.

The release of savings will add significantly to spending, she said and this will be significant with spending accounting for half of all economic activity. “But I don’t see people running down their savings super rapidly.”

In terms of the impact on the economy, spending on domestic services – a meal out, a haircut, a staycation or whatever – will have big impact as the cash stays in the economy and supports jobs in sectors that have decimated.

So will supporting Irish retailers, particularly those selling home-produced goods. Buying on foreign goods – a car, a foreign holiday or whatever –has less of an economic impact, though of course boosts sectors like travel agents and the car industry. And most transactions see a cut going to the tax authorities in VAT or excise duties.

2. Go Green – or Greener

Policy makers could try to get people to spend their savings in ways which meet other policy objectives, said Lawless – for example, making their homes more energy efficient or buying an electric car instead instead of a diesel one.

Getting your home “dickied up” to use the Simon Harris phrase, also has a big domestic economic boost and as part of this many are improving insulation or undertaking other energy saving projects.

You may qualify for a grant towards the expense from the Sustainable Energy Authority of Ireland (SEAI), who have Government funding for support in areas like insulation, installing heat pumps and so on, generally for houses built before 2006.

Government support is available for major home retrofitting programmes – these are big and costly projects and currently applications are via providers and not as individual households.

3. Maintain emergency cash

The pandemic has shown how quickly and brutally economic circumstances can turn. While Government supports have put a floor on incomes, many households in exposed sectors – including business owners – have suffered significant income falls and their savings have been wiped out.

This may lead in future to a higher level of what are called precautionary savings for those who can afford this – money put away in case of a sudden income loss or an unexpected expense.

Financial adviser John Lowe, author of the Money Doctor books, recommends that people try to have accessible savings equal to three to six months of their after tax incomes.

“It is a good time to check your rainy day fund,” he said, to ensure you have cash to meet an emergency ( your car breaks down), deal with sudden loss of income or to meet an opportunity, for example a house deposit.

4. Pay down debt

Some households now have both savings and expensive debt. Once you get past the need to have a bit of a float for emergencies, this makes no sense.

Liam Ferguson, financial consultant with Ferguson and Associates, says the first step is to rank debt from that with the highest interest to the lowest. Outstanding credit card balance, generally with double digit interest rates, should be cleared first if at all possible, he says. Then consideration given to the most expensive category – unsecured consumer debt such as personal and car loans.

It is essential to check that there are no penalties for paying early. PCP car loans, because of the way they are structured, may not be a candidate for early repayment.

Lowe says that if funds are not available to pay down the entire credit car debt, an option is to transfer to An Post Money who give you 15 months to repay at a zero interest rate.

5. What about the mortgage?

Mortgage debt is generally cheaper, so pay other debt off first. Tracker mortgages are generally on very low rates – it is the cheapest you will ever borrow at, so probably not a candidate for early repayment.

Those on higher variable rates could consider repaying some of the loan early – just check first on how the lender handles this and whether there are any penalties or repayment limits. Upping monthly repayments may be a viable strategy – potentially shortening your term and making longer-term savings – but be careful that this doesn’t leave you borrowing elsewhere, for example on your credit card.

Like a saving plan, upping mortgage repayments can deliver a return, but it is a long-term one.

5. Boost your pension

Using extra funds to pay more in to your pension via, for example, additional voluntary contributions, can be worthwhile. If you have the financial firepower to do this, Ferguson says, that a useful way to think about is whether you can get tax relief at the higher 40 per cent income tax rate on what you put in, but currently would only be paying at the lower rate when drawing down your pension.

Professional advice is essential in relation to pensions. If you can spare the cash, the tax relief on AVCs does give a decent incentive – delivering an immediate 20 or 40 per cent return depending on your tax rate.

The only other place to get that kind of return these days is a long-odds winner in the bookies. But obviously you are tying up the money, generally until you retire.

6. Put money into savings

The savings issue is now a real dilemma, Ferguson says. There is now little or no return on deposit accounts anywhere – and charges are likely for larger deposits before time. Meanwhile, rock solid options, like State savings schemes, while delivering some return are pegged at low interest rates and require putting your money away for a period.

So any decent level of return does require a risk – and so Ferguson says people should proceed with caution and only allocate a portion of their cash to riskier areas.

This generally involves investment funds – Lowe says a range of products are available from companies such as Zurich and Irish Life involving the commitment of a regular monthly amount. These products do have charges, are reliant on market trends and in some cases taking money out before a set period of time attracts penalties.

Smaller investors can also get access to the market by buying exchange traded funds, which generally track big market indices – be careful of the tax implications and get advice if you are investing any significant amount.

The stock market, over the long term, has returned for investors but the ups and downs mean you need to be prepared to commit for some years. Markets are now a bit nervous due to uncertainty about how world economies will emerge from the pandemic.

7. Build up the savings

Before the pandemic, people generally saved for one of two reasons, says Lawless of the ESRI – a rainy day fund or to pay for a larger item. She believes some of the lockdown savings are now likely to be used for larger items over the next few years, whether that be a dream holiday, a car or a house deposit.

Either way the financial firepower in many households will now be significant and the decisions they make are important for the economic outlook.