Ireland's Savings Vs Investments: A Balancing Act

Ireland's savings and investment landscape offers a range of options for individuals looking to grow their money. The country's residents have maintained a high household saving rate, with a focus on building financial assets through deposits in banks and other financial institutions. While savings accounts provide a safe and accessible way to grow finances, investments offer potentially higher returns over the long term, albeit with varying levels of risk. With interest rates on the rise, individuals must weigh the benefits of saving versus investing to make informed decisions about their financial goals.

Fixed-term vs. demand deposit accounts

Fixed-term deposit accounts and demand deposit accounts are two types of savings accounts available in Ireland.

Fixed-term deposit accounts are ideal for those who have a lump sum to put away, perhaps from an inheritance, retirement, or savings built up over the years. This type of account offers a fixed interest rate for a chosen term, usually ranging from 3 months to 5 years. Some banks, like Bank of Ireland, also offer fixed-term accounts with terms of 6, 12, and 24 months. These accounts often require a minimum deposit, such as €5,000, and may offer a guaranteed return on your savings. With a fixed-term account, you generally cannot make additional deposits after the initial lodgement, and early withdrawals may incur penalties. However, they provide security for your money and can offer higher interest rates than easy access accounts.

On the other hand, demand deposit accounts, also known as easy access accounts, offer savers quick access to their funds. With these accounts, you can freely deposit and withdraw money without restrictions or penalties. They are ideal for those who want flexibility in managing their savings. However, the interest rates on demand deposit accounts are variable and typically lower than those offered by fixed-term accounts.

When choosing between a fixed-term and a demand deposit account, consider your financial goals and needs. If you want to earn higher interest rates and are comfortable with locking away your savings for a fixed term, a fixed-term deposit account is a good option. On the other hand, if you prioritize flexibility and easy access to your funds, a demand deposit account may be more suitable.

It's worth noting that, as of June 2024, some of the highest interest rates available in Ireland are on fixed-term deposit accounts, such as the 3.75% offered by Trade Republic on instant access balances of up to €50,000.

Savings accounts for different life goals

Savings accounts are a great way to strengthen your finances and act as a rainy-day fund or pension pot. Here are some savings accounts for different life goals:

Emergency Fund

It is recommended to have three to six months' worth of living expenses in an emergency fund. This will ensure that you can meet your needs if you lose your income. Having a separate account for emergencies will prevent you from using those funds for other expenses.

Short-Term Goals

Short-term goals are those you aim to achieve within a couple of years or less. They tend to be specific and have clear deadlines. Examples include rental deposits, car purchases, and vacations. High-yield savings accounts, money market accounts, and short-term certificates of deposit (CDs) are suitable for short-term savings goals as they offer accessibility and competitive interest rates.

Medium-Range Goals

Medium-range goals typically take a few years to achieve and may be more expensive than short-term goals. Examples include saving for a house down payment, education, or a wedding. For these goals, you may want to consider a high-yield savings account, money market account, or a certificate of deposit with a longer term. You may also want to set up savings buckets within a single account or ladder CDs to achieve your goals.

Long-Term Goals

Long-term goals usually take at least five years to achieve, with retirement being the most common one. For long-term savings, you may want to consider employer-sponsored retirement accounts, traditional or Roth IRAs, or high-yield savings accounts.

Children's Savings

If you're planning to start a family, setting up a savings account for your children or grandchildren can help them in the future. Some accounts, like the EBS Children's Savings Account, offer competitive interest rates of up to 2.50% annually on amounts up to €5,000.

Wedding Savings

With the average Irish wedding costing around €36,000, saving for your big day in advance can help reduce financial stress.

Christmas Savings

Christmas shopping can be made more affordable by spreading the cost throughout the year.

House Deposit

If you're saving for a house deposit, consider accounts with restrictions on withdrawals, such as fixed-term deposits, to help you stay on track. Bank of Ireland's MortgageSaver account offers a €2,000 bonus interest on your savings if you take out a mortgage with them.

Retirement Savings

It is recommended to save at least 10 times your annual salary for retirement. Fixed-term deposits or pension plans are suitable for this goal, as they offer competitive interest rates and tax benefits.

Pros and cons of savings accounts

Pros of Savings Accounts

Savings accounts are a great way to strengthen your finances and act as a rainy-day fund or pension pot. They are easy to open and you can withdraw and deposit money anytime (within certain limits) by using online transfers and cashpoints. They often also have low deposit requirements.

You can grow your money with savings accounts by choosing one that offers a competitive rate of interest. A savings account can come with perks, such as insurance, recreational benefits and bonuses.

Most savings accounts don’t lock you in for any period of time, meaning you can change whenever you like. Savings accounts provide a liquid asset that you won’t have to sell or go through lengthy procedures to have access to.

Up to €100,000 of your cash is protected in the unlikely event that your institution fails.

Cons of Savings Accounts

Low-interest rates might mean that your money isn’t growing at the rate you would like it to. Inflation could mean that your money ends up having less buying power if interest rates remain low.

Some savings accounts have a minimum balance requirement, such as €500 a month, meaning you will need to deposit this amount every 30 days. While easy access can be seen as a major plus, it also means that saving could be difficult if you often give in to temptation, and these types of accounts typically offer less competitive interest rates.

Some savings accounts will have restrictions in terms of withdrawal limits and access. Be sure to check the terms and conditions before you commit.

Savings vs. investments

There are a variety of ways to grow your money, and saving and investing are two of the most common methods. While both are effective strategies for increasing your financial wealth, they differ in several key ways.

Saving typically involves putting money aside in a bank deposit or regular savings account, earning interest over time. People often save for specific goals, such as purchasing a new car, a house deposit, or building an emergency fund. Savings accounts offer easy access to your money, and your funds are generally covered by deposit guarantee schemes, ensuring their safety. However, savings accounts usually provide lower returns compared to investments, and the interest rates may be relatively low, impacting your overall growth.

On the other hand, investing generally means committing your money for a longer period, aiming for higher returns than what you would achieve through saving alone. Investing can help you reach long-term financial goals, such as funding a child's education or planning for retirement. However, investing carries a degree of risk. There is no guarantee that you will make substantial profits or even recoup your initial investment. The performance of your investments will determine the growth of your money.

When deciding between saving and investing, it's essential to consider your financial goals and risk tolerance. If you might need access to your money within a shorter timeframe, such as 5 years, savings accounts are usually a more suitable option. Savings accounts provide liquidity and often have minimal restrictions on withdrawals. In contrast, investing typically involves locking up your funds for an extended period, and you may not have immediate access to your money.

Additionally, it's worth noting that interest rates play a significant role in the growth of your savings. While savings accounts may offer lower returns, they can still be attractive when interest rates are high. However, when interest rates are low, as they are currently, the returns on savings accounts may not keep up with inflation, resulting in a loss of purchasing power. In such cases, exploring investment options that historically provide higher returns may be more advantageous.

In summary, both saving and investing are valuable strategies for growing your money, but they serve different purposes. Saving is generally lower risk and provides easier access to your funds, making it ideal for shorter-term goals and emergency funds. On the other hand, investing offers the potential for higher returns but carries more risk and usually requires a longer-term commitment. Ultimately, a balanced approach that combines saving and investing based on your financial goals, risk tolerance, and market conditions can help you optimise your financial growth.

How to compare savings accounts

While saving and investing are both good ways to grow your money, they are quite different. Saving typically involves putting money aside in a bank account, earning interest, and having easy access to your funds. On the other hand, investing usually means committing your money for a longer period, with the possibility of higher returns but also greater risk.

Interest Rates

The interest rate is crucial when choosing a savings account. Higher interest rates mean your savings will grow faster. However, it's important to note that some accounts with higher interest rates may have more restrictions on accessing your funds.

Account Type

There are several types of savings accounts, each with its own advantages and disadvantages.

• Fixed-term deposits/deposit accounts: These accounts offer guaranteed returns over a fixed term, typically between six months and five years. The longer the term, the higher the interest rate. However, you won't be able to withdraw money during this period.
• Demand deposit accounts: These accounts offer flexibility, allowing you to withdraw and deposit money whenever you want. They usually offer variable interest rates, which can increase or decrease.
• Regular savings accounts: These accounts are ideal for those starting with a small amount rather than a lump sum. They often require you to save a set amount each month and may have stricter rules regarding withdrawals.

Fees and Charges

Some savings accounts may have account maintenance fees, annual fees, or minimum balance fees. Be sure to read the fine print to understand all the fees associated with the account.

Access to Funds

Consider how often you will need to withdraw money from your savings account. Demand deposit accounts usually allow for more frequent withdrawals without penalties, but they typically offer lower interest rates than fixed-term accounts.

Minimum Deposit and Balance Requirements

Some savings accounts have minimum initial deposit or minimum monthly deposit requirements. If you're just starting to save, look for accounts without these requirements.

Perks and Bonuses

Some savings accounts offer additional perks, such as insurance, recreational benefits, or bonuses. These can add value to your account.

Safety and Reliability

Your savings should be protected in case of an unexpected event. Look for accounts that are covered by a Deposit Guarantee Scheme or similar protection.

Taxes

Don't forget to consider the tax implications of your savings. In Ireland, for example, interest earned on savings is subject to Deposit Interest Retention Tax (DIRT), currently at 33%.

Online Accessibility

Many savings accounts now offer the convenience of managing your money online. This can include features such as online transfers, paperless applications, and easy access to account information.

By carefully considering these factors, you can choose a savings account that suits your financial goals and provides a competitive rate of return.

Frequently asked questions