Saving: a challenging lifelong habit

For anyone on a regular weekly or monthly income, putting a little aside each month is the easiest way to build a decent nest egg over the years. For farmers, where there can be huge swings in income from month to month and year to year, building that nest egg can be substantially more difficult.

When running your own business any extra money is often pumped back into the enterprise, rather than put aside for the future. This kind of investment can be a good use of funds, but a clear business case for it must be made beforehand. The usual seasonal farming activities, like sowing crops, buying calves for fattening, or getting your cows in-calf, are all normal spending for farmers, but they also can be seen as investments in the future which will have a payoff.

Spending extra funds on that shiny new tractor might be tempting, but the return on the decision would have to be calculated before it could be justified on financial grounds.

As every farmer knows cash flow is king, and spending extra cash in the business without a clear return could cause a shortfall in future, during difficult years.

The kind of forward thinking that farmers use every time they make a decision about their farm enterprise is exactly the same kind of mindset that is needed for good financial planning. If a farmer doesn’t get their stock of fodder right for the winter, then the future of their business could be in trouble. By the same measure, if a farmer doesn’t get their savings habit right, then they could find themselves short when their need is greatest.

Savings options

With that in mind, let’s look at some of the savings options available. First up is one that might not look like savings at all, but is among the most useful things that can be done to improve your future financial health – and that is to pay down debt.

If there are some extra funds in the business, then making extra payments on loans, or paying down merchant credit, bank overdrafts or credit cards is about the most efficient way of saving for the short to medium term. With interest rates on overdrafts above 12%, on credit cards around 20% and some merchant credit approaching 25%, reducing any of those balances will help cash flow over the medium term (see Figure 2). While making extra payments on variable rate loans will generally not reduce the monthly payment, they will reduce the number of payments outstanding – which again will lead to reduced costs over the medium to long term.

For example, increasing the payment on a four-year €20,000 loan at 8.5% annual interest, by €100/month, will reduce the overall term of the loan by nine months and save over €700 in interest payments. Alternatively, saving €100/month in a savings account at 1% interest will only have earned €95 in interest over a four-year period.

With interest rates for saving being so low, and the rate of inflation running faster than previously was the case, there is a problem where the purchasing power of your money will be lower in future than it is now.

The Central Statistics Office has an inflation calculator on its website where this effect can be clearly shown. It shows that it takes €120.14 today to purchase in what cost €100 in July 2021.

Looking at the four-year period before that, there was almost no inflation in the economy, and €100 of goods and services in July 2017 would only have risen in price to €103.07 in the four years to July 2021.

This might suggest that saving money during times of elevated inflation is a waste of time and money. However, there is a strong counter-argument to this, and it’s a fairly simple one.

Whatever about your money having less spending power in the future, it is almost certain that whatever you spend your money on now will be worth less in the future.

This erosion of spending power is why policy-makers are so keen to keep inflation under control over the medium term. If it stays low – the target is generally around 2% – then it will not destroy the incentive to save and while also providing an incentive to spend money on what is necessary.

Presuming you have your credit situation under control and have some extra cash to put aside, there are many options open to you, depending on what your risk appetite is, and how long you intend to save for. Credit institutions such as banks and credit unions are the low-risk options of saving, with the Government deposit guarantee scheme ensuring that the first €100,000 on deposit is covered in the event that the institution should fail. It is worth noting that this guarantee is a per-institution limit, so if your savings are substantial, then it is worth spreading them across institutions to take full advantage of it.

As noted above, however, the return on these savings can be tiny, so if you are looking to build a nest egg for the longer term, then greater gains can be made in investments in financial products. While the price of stocks rise and fall, leading to potential losses in the short term, the trend over the last several decades is for them to provide reasonable returns, if you have the appetite for the increased risk.

Taking our four-year example above, if you were to invest €100 in the main index of Irish shares, the ISEQ 20, in July 2021 that investment would now be worth €141.81, a figure which comfortably beats even the dilution of spending power from inflation over the period.

It is worth noting that an investment of €100 made in May 2007 would be worth the same €100 today, which again highlights how share prices are volatile and do not provide a guaranteed return.

If you want safety, saving with a bank or credit union, if you want potentially higher returns, talk to a professional financial adviser about what’s best of your situation and risk tolerance.

If you are feeling tempted about looking at the options for your money, then it is critical to talk to a qualified, and regulated, financial adviser who will be able to discuss your needs and help find the best product for you. Be sure to check that any financial adviser you are talking to is registered with the Central Bank of Ireland.

It is also good to make sure the person you are talking to is independent from the bank or broker who is directly selling the product. Some advisers get substantial commissions for selling their own products so may be more tempted to point you in the direction that is best for them, rather than for you.

As a general rule of thumb, investments in bonds are less risky than investments in stocks or shares, but as there is less risk, the potential returns are also generally lower.

Be particularly aware of investment ideas which seem to offer unusually high returns – if something sounds too good to be true, it invariably is. There are plenty of stories about people investing in property projects in far-flung places offering huge returns, only to find that the property is never built and their money is gone.

The choice in how to save also depends on what it is you are saving for. Putting money aside for Christmas or a holiday should be kept in a bank where it is easily accessible, while longer-term savings for something like a child’s college education can be put into a reduced-access account (with 30, 60 or 90 days’ notice required to drawdown the money) where there is the potential to earn a slightly higher rate of interest.

Finally, the very best savings plan that anyone can have is a pension plan, but more on that on page 46.

Overall, no matter what the goal is, or the time horizon, the most important factor with saving is to be in the habit of doing it. Rather than seeing savings as a “nice to have”, it should be seen as an expense that needs to be met, even if the money put aside in some months is very small.

There is no better habit to have when it comes to making your life easier over the longer term.

Irish people saved 14% of their income in the first quarter of 2025. This is a reasonable target for farmers to have over the medium term, with increases in the amount of money put aside in good years making up for reduced savings when times are tight.