Getting into the saving habit when it is easier to spend

Three-quarters of Irish people prefer to spend money on holidays and treats than save money, according to a recent financial awareness survey by Royal Liver.

The survey also revealed an increasing reliance on debt: we are more likely to own a credit card than two years ago and more likely to have greater outstanding personal loans than five years ago.

But evidence of our "spend now, pay later" culture is contradicted by the fact that over 1.1 million Irish people are currently participating in a mass saving exercise.

As holders of Special Savings Incentive Accounts (SSIAs), they are contributing up to €254 a month to a savings account in order to secure a Government bonus of €1 for every €4 they save.

There are many reasons to save, according to EBS Building Society's Little Book about Saving and Investing. "By saving regularly you are in a better position to deal with emergencies, upcoming events such as weddings and birthdays, and it also makes it easier to afford those larger purchases that are needed in the near future."

In other words, savings help us manage "life events" without having to resort to debt.

But it seems that in the case of SSIAs, it was not this theory but the Government's financial incentive combined with a desire to keep up with their peers that prompted so many people to become savers.

"There was a great herd mentality," says Mr Gareth McQuillan, head of marketing at Bank of Ireland Life. "People think if everyone else is doing one, I should be doing one too."

According to Bank of Ireland, 76 per cent of SSIA savers did not contribute to any other savings scheme, excluding pensions, before they opened their SSIA between May 2001 and April 2002, when the scheme closed.

The bank's research suggested that there were more "novice" savers in the 18-24 and over 55 age groups, with a more significant proportion of "experienced" savers in the 25-34 age bracket.

Almost half of people responding to Bank of Ireland said the Government bonus was the primary reason for opening an SSIA. As a result, Mr McQuillan believes that many have not yet decided what they will do with the money once it matures between May 2006 and May 2007.

"A lot of people don't know now what they're going to spend their money on in six months' time, never mind two-and-a-half years' time. They did it because they thought it was the right thing to do, not because they had [ something] in mind," he says.

Bank of Ireland and EBS have both joined the chorus of financial institutions and advisers recommending that SSIA holders maximise their contributions up to the €254 monthly limit in order to benefit from the greatest possible Government bonus.

But for those who did not sign up to the scheme in time, where should they look for a risk-free home for their savings?

At the moment, Northern Rock (www.northernrock-ireland.ie)pays the most interest on demand, offering a compound annual rate (CAR) of 2.6 per cent on its demand online account, with an introductory bonus taking this up to 2.8 per cent for the first six months.

But a minimum deposit of €1,000 is required, so savers without a lump sum to spare will first of all have to accumulate money in a less generous regular savings account before they can benefit from the Northern Rock rates.

The initial minimum balance needed is just one of the factors that might influence a saver's choice of account. Others include whether or not there is a set term, whether ongoing contributions are required and what kind of access there is to the money.

The table shows some of the other deposit accounts that have no specific term and require relatively low minimum balances.

Another question that committed savers will ask themselves is how much is enough? How much savings will cover all eventualities?

According to financial adviser Mr John Lowe, it often depends on the person's age and family status.

"A single person in his or her twenties without any responsibilities and low overheads probably only needs to have enough cash to cover three months' worth of expenditure," Mr Lowe writes in his book The Money Doctor.

However, a couple with children, a mortgage and a car should probably aim to build up around six months' expenditure in their emergency fund.