It’ll pay in long run if you put budget relief aside as savings
Your next pay cheque should be a little bit heavier, thanks to changes in budget
With Christmas still fresh in the memory, it is unlikely too many of us will be feeling flush with cash in these dark days of January. However some relief – albeit of the light variety – is on the way, and your next pay cheque should be that little bit heavier, thanks to changes announced in October’s budget.
While the temptation will be to use this extra money to help pay down that mounting pile of bills, if you can manage to increase your savings in 2015, your future self will thank you for it. Indeed, figures show that if you can bump up your savings by just 1 per cent a year, the rewards will be substantial.
Take someone saving 2 per cent of a €50,000 salary. After 10 years they will have saved €13,461 based on a return of 5 per cent and annual salary increases of 2 per cent.
However, if they had upped their savings by just one percentage point, they would have more than €20,000 over the same period – and if they had upped their savings by one percentage point each year, they would have a staggering €51,000 at the end of the 10 years.
So, if you want to get serious about saving in 2015, remember that every little helps. Here are some tips to get you on your way.
According to figures compiled by PwC, a single person earning €40,000 a year will get to keep an extra €37 (€444 a year), while a married couple with one person earning the same amount will save €15 a month, or €174 a year.
A single person earning €100,000, meanwhile, will keep €62 a month, or €747 a year; or €91 a month/€1,092 a year for a married couple both working.
If you have children, you will also see your child benefit increase by €5 a month starting in January. While it may not appear much, if you have three children it equates to €15 a month, or €180 a year, which will add up over time if you can afford to save it.
While the bonus boost will be tempered somewhat by the impending introduction of water charges, it does give you an opportunity to put away a little bit extra each month.
Depending on the structure of your mortgage, you may have also benefited from the recent reduction in mortgage rates by some of the domestic banks.
While existing customers were excluded from variable rate cuts at both Permanent TSB and BoI, AIB cut its standard variable rate by 25 basis points back in December. So, if you have a €250,000 mortgage over 30 years you will have been making a monthly repayment of €1,266.
From December, this will have come down by 25 basis points, saving you €37 a month. If your mortgage is double that, at €500,000, your savings will also be double, at €74 a month.
Tracker rate customers will have also benefited from a European rate cut in 2014 and may also be in a position to set aside these extra funds each month.
If you do have one, try and take advantage of the savings outlined above to top it up. While returns for lump-sum deposits have shrunk substantially in recent years, you can still get a return of about 4 per cent on regular savings if you shop around.
Best of the bunch at the moment is Nationwide UK Ireland, which offers 4 per cent on savings of between €100-€12,000 (ie €1,000 a month). If you put €100 into this account each month, you would earn €26 gross at the end of the year. At the maximum allowable, ie €1,000, your gross return would be €260. A slight catch is that the term of the product is 15 months, but you are allowed two withdrawals.
Your local credit union is another option, as is saving with the State savings scheme. With the instalment saving scheme, you can earn 7 per cent over 5½ years (1.24 per cent AER), by saving in the first year and leaving your funds to grow for the remainder of the term.
While the return might appear low, it is tax free, which means that it is a lot more competitive than it looks at first glance, given that Dirt is now of the order of 41 per cent and PRSI at 4 per cent may also apply. You can also start with as little as €25 a month or as much as €1,000.
Remember to keep an eye on the maturity of any regular savings product you may have. While favourable rates may be offered at the outset, these typically lapse after 12 months and the balance is rolled into a much lower yielding account. This means that while you can keep saving on a monthly basis, you should move the balance each year into a higher yielding account.
If saving for your children’s education is a priority, you should also exercise due caution when it comes to picking a savings product. Typically, if a product is being packaged as such, it will probably not offer good value. Take the example of Bank of Ireland’s Child Save account.
You can save between €20-€500 every month with the account, which is opened in the child’s name and reverts to their own account when they turn seven. However, you will earn just 0.25 per cent on the account. Or how about EBS’s children’s savings account, which pays 2.01 per cent in interest – even though its family savings account pays a higher 2.25 per cent rate.
Take a risk
Given the aforementioned increase in Dirt, which may take as much as 45 per cent of any gain you may make, taking a risk on getting a greater return may pay off. Even though the rate of tax is the same on investment funds at 41 per cent, if your return is greater the amount you get to keep in your pocket will also be greater.
Equity markets had a good 2014 – the Iseq advanced by 15 per cent, while the S&P 500 rose by 11 per cent and the Nasdaq was up by 13.4 per cent. While risks remain, market commentators suggest that 2015 could be another good year, although returns will likely be more muted.
Putting money away each month into an equity investment can be a good approach, as “averaging in” will ease volatility and leave you less exposed to abrupt market moves. For example, if you buy into a fund which suddenly plummets one month, you will be buying into it a lower price the following month. Most Irish investment managers now offer the facility to adopt such an approach.
If you are buying into a passive fund which typically tracks an index, management charges will be key, so be sure to shop around for the best value.
While exchange-traded funds (ETFs) typically offer the best value, with annual management charges from as low as 0.10 per cent, stockbroker fees incurred when buying into such a fund typically make the cost prohibitive for a regular savings approach.
With Rabodirect, you can choose from a range of 60 funds and opt to invest on a weekly, fortnightly or monthly basis, which can help smooth out those dips in the market. Management charges are 0.75 per cent to enter a fund and a similar amount applies to exits, while annual charges of between 0.45 -2.10 per cent also apply. Remember that if you opt to invest on a monthly basis, this entry charge will apply each time – so €0.75 for each €100 investment, rising to a heftier €7.50 for a €1,000 contribution.
It’s not just bonds or equities you can consider. Irish Life ‘s Clear Regular Invest offers eight multi-asset funds to choose from. You can start investing with just €100 a month, but the funds don’t come cheaply, with annual charges of upwards of 1.65 per cent.
Meanwhile Zurich, for example, offers a “fund of REITs” option, which allows you to invest in Irish commercial property via real estate investment trusts.
When choosing a fund, ask the fund provider if any policy fees, trail commission or clawbacks apply to the fund – these can all eat into your returns.
Take the example of someone whose mortgage rate has decreased and who has to pay €37 less a month. If you leave this €37 in your bank account, it is likely that it be spent without you noticing it. If, however, you simply notify your bank to leave your repayment as stands, your €37 will be put to much better use. Indeed, on a mortgage of €250,000 over 30 years, if you had overpaid this by €37 every month from when you first bought your property, you would have saved yourself some €10,000 in interest - and paid off your mortgage more than a year earlier.
Similarly, directing extra funds to pay down a car loan or credit card bill can have a greater financial reward than simply saving the money. Home thoughts: Saving for a house If you are saving for a home in 2015 and fear that you might have to stump up a deposit of 20 per cent of the purchase price, your interest may have been piqued by the pronouncement in October’s budget from Minister for Finance Michael Noonan about a Dirt refund savings scheme.
Almost three months on, though, where is it?
According to the Revenue Commissioners, it is currently developing an online administrative system to operate the scheme and it is envisaged that the system and relevant guidance will be made available in the first half of this year.
Once up and running, first-time buyers will be able to make a claim to the Revenue Commissioners for a refund of the Dirt, the deposit interest retention tax, they have paid on the interest earned on the savings made towards the deposit for a home.
The relief applies on savings of up to 20 per cent of the purchase price. You can claim the relief on savings made in the four years running up to the purchase of the property.
It has, however, been dismissed as a gimmick by some, who argue that it will not make much of a difference for hard-pressed first-time buyers.
For example, you save €10,000 and earn interest of €250 (ie at a rate of 2 per cent), you will get to keep the full €250, rather than forgo €102.50 as would otherwise be the case.
It is hardly life-changing, but the €102 is still better in your pocket than in the Government’s coffers.