Regular saving always pays

Saving is a habit. For people on a regular monthly or weekly income, it can be easier to put aside a regular amount for a rainy day.

For farmers, with income often concentrated in a few weeks of the year, it can be much more difficult. Often, money is spent before it is even earned – and there is usually a temptation to put any extra money back into the farm, rather than putting it aside for the future.

That being said, farmers are natural savers, even if it is not always money that is being saved. The whole business model is based on taking action now for a payoff in the future.

Planting seeds, getting cows in calf and buying weanlings to fatten are all types of investment. The seasonality of the work, when the warm summer months are used to build stocks of fodder, is literally putting something aside for a rainy day.

Farmers don’t harvest hay, they save it.

The same kind of forward thinking, which is fundamental to any farming business, should be applied to financial planning.

If a farmer doesn’t get their fodder stocks right for the winter, their future as a farmer could be in trouble.

By the same measure if they don’t get their cash savings on the right track, their future – especially in later life – will be more difficult than necessary.

There are different ways of saving, and depending on the goal, different products which will work best. Also, there are ways of saving which might not necessarily be thought of as “saving”.

Short-term measure

The single best short-term measure to take when there is extra money available is to pay down debt. Paying off loans, overdrafts, merchant credit and credit cards is about the most efficient way of saving.

The interest rates charged on credit are high – with some merchants charging over 20% per annum, with credit cards and overdrafts not far behind.

There is no safe way of earning that kind of return on a savings product, so getting debt paid down literally is a case of a euro saved being a euro earned.

With term loans, increasing the monthly payment can make significant reductions in interest paid. For example, increasing the payment on a four-year €20,000 loan charging 8.5% by €100 a month will reduce the term by nine months and save €700 in interest payments.

Putting €100 a month into a savings account paying 3% per year for the same amount of time would yield total interest earnings of less than €250.

In recent years, where inflation has been very high, an argument can be made that saving makes little sense.

After all, if the rate that banks are paying on deposits is significantly lower than the rate of inflation – as it was for much of the past few years – then your savings are losing purchasing power in real terms.

The counter-argument here is quite strong because whatever about your money being worth less, whatever you spent it on two years ago instead of saving it will certainly be worth less.

This is part of the reason why policymakers are so keen to keep inflation low – there are no good outcomes from high inflation.

For those with a higher-risk tolerance, greater gains can be made through investment in financial products. An €10,000 investment in the main Irish stock exchange index two years ago would be worth around €15,000 today.

However, investments in stocks have a large element of timing in them – a €10,000 investment in the same index in May 2007 would be worth €9,700 today.

Potential returns are much, much lower with bank savings accounts, but with such deposits guaranteed up to €100,000, the chances of actually making a loss are close to zero.

When investing in financial products, there is no guarantee at all that you will get your money back.

If you are tempted by becoming a more active investor, it is critical to talk to a qualified financial adviser who will be able to discuss your needs, and your risk tolerance, in order to help find the best product for you.

Be sure to check that any adviser you talk to is registered with the Central Bank of Ireland.

It is also a good idea to get advice from someone who is independent from the bank or broker who is directly selling the investment you are looking at.

As a general rule of thumb, investments in bonds are less risky than investments in stocks and shares. As bonds are less risky, they also have lower potential returns.

Be particularly aware of people trying to sell investment products which claim to offer unusually high returns – if it seems too good to be true, it almost certainly is.

The choice of how to save can also depend on what you are saving for. Short-term savings for things like a holiday or Christmas presents should be kept in a bank or credit union account where there is easy access to them.

Longer-term or rainy-day savings can be put into higher interest accounts with reduced access, or invested in other financial products.

Finally, the best savings a working person can make is to pay into a pension plan, but more on that on page 50.

Overall, no matter what the goal is or the time horizon, the single most important factor to build savings is to get into the habit of doing it. Rather than seeing it as “nice to have”, see it like paying your electricity bill or putting fuel in your car. It is an essential element of making your life easier over the long term.

Irish people generally save between 10% and 15% of their income – except for during the pandemic where that ratio ran into the 30% range (Figure 1).

The most recent data from the CSO showed that the seasonally adjusted saving ratio for the first quarter of this year was just below 15%, a figure that was equal to €6.59bn saved in the three-month period.