Personal Finance
#saving #investing
‘For my money, is it better to save or invest?’
To save or to invest, depending on a number of things can actually mean the same thing. As you’ll read below, they can also be very different. The real question is, what is your plan for your money? We could be talking about saving €500 a month or we could be talking about investing €50,000. For an advisor, the same principles should apply in answering this question.
Is it a short-term plan for example saving for a holiday, home improvement or a short secure option if you have a need to use your money for a house deposit next year? However, when looking at longer term options, it would generally be better to use an investment account. This may be suitable for retirement savings or your children’s education.
Before any saving or investing decision is made, it is vital that you have an emergency fund in place. Generally speaking, this should equate to a minimum of 3 months net (take home) income. So, if your family net income is €4,000 per month, you should try to keep €12,000 on deposit and readily available for emergency use.
For the likes of home deposits, holiday money for next year (Please God!), or for home improvements that you intend on doing this or next year, these are very short term uses and you would require access to the money within a relatively short term (within 5 years max), it is better to put this money on deposit. The shorter term you require use of the money, then the more accessible with as little risk as possible the money should be. The best place to do this may be with your bank or credit union.
Beyond 5 years is where you might want to start thinking about an investment account. A lot of our clients want to save for a rainy day or for their children’s education. They just want to take money out of their personal bank account and want to find an option that will pay them an interest for their savings. Nowadays, there are very little if any ‘high interest’ savings accounts. So therefore, we would recommend investing these savings over the medium to long term (5 to 10 years). Once the decision is made to look beyond a 5-year period, it is then important to align your savings with how you feel about taking risks with your money. You should be asked to complete an attitude to risk questionnaire and from there an advisor can assess how to invest the money for you. This risk scale goes from 1 (least amount of risk) to 7 (most amount of risk). There are plenty of different types of these questionnaires built by different investment companies. Ultimately though, you should not be investing money without having completed one and discussing the outcome of your questionnaire with your advisor.
Now we’re getting into the longer term again, say 10 Years +. You could find yourself in this category for children’s education savings, or the want to make your money earn a decent return (better than inflation) over the long term. The basic principles as outlined already still carry weight here. One of the main savings goals in this category is saving for retirement. Pension funds are one of the longer-term investments and it is more acceptable to take more of a risk with this type of savings or investment plan. In a general sense, equities or an equity style investment (company shares) will outperform any other type of investment over the long term.
When investing or saving, ultimately you have the option to select what type of fund you want to invest in. Something very popular at the moment is the ability to invest in an ethical style fund. Others may select a fund with a lot of IT or property funds. There is a world of choice out there and if you do not understand this type of investing it is so important that your advisor provides you with a breakdown of the investment or savings plan that you are entering into and explains the components of these and why they are suitable to you.
At some point when talking about saving or investing, you may have heard this phrase. ‘It is not about timing the market; it is more about time in the market’. This is very true. When you do start an investment or a longer-term savings plan, nobody can predict what might happen but we can say this. The longer you invest or save for, the better the opportunity you have to gain a return. Remember there is no such thing as a crystal ball and no advisor can say for certain how something will perform. Make sure you understand the investment or savings plan you decide to take out and make sure your advisor explains the investment features associated with your decision in full.
So to answer the question, ‘For my money, is it better to save or invest?’ you really need to ask yourself, ‘what is your plan for the money?’. Once this has been discussed with your advisor, it will become apparent what the right course of action is for you. If there is anything in this article that you would like to get more information on, email our Personal
Financial Planner Jonathan McDonnell at jonathan@castlecapital.ie.
Castle Capital Financial Planning
