Working your Cash Hard for a Rainy Day

Irish News of the World

Sunday May 24th, 2009

Diarmuid MacShane

Working your Cash Hard for a Rainy Day

Sometimes these days it’s hard to know whether to laugh or cry. As jobs are lost nearly every day, yet with the end of the Celtic Tiger comes cheaper shopping – prices fell by 3.5% on average in April alone.

Falling interest rates means some of us have cheaper mortgages while others are stuck paying fixed amounts every month. And falling rates are causing headaches for those of us who are trying to save a little nest egg for a rainy day.

Saving Ireland

In 2007 we were saving 3% of our disposable income, while now we’re saving over 3 times that at 10%. According to the NIB who releases those figures, “Irish households are saving by buying less”.

Do what mother says!

Growing up, we were always told that we should have a little savings in reserve in case of a rainy day. Some of us, unfortunately, may experience that rainy day sooner rather than later, and not just because our summer hasn’t started yet.

A rainy day fund should probably contain enough money to allow you cover your monthly expenses until you find a new job. To avoid having to wait to get access to your money, it should also be easily accessible in an emergency. Depending on your line of work, your rainy day fund could be anything from 4 weeks to 6 months or even more in the current job market.

Getting any Interest?

Even though keeping large amounts of money in your current account means that it’s the most accessible possible, apart from Halifax who pay 7% up to a balance of €2000, current accounts pay the worst interest of all – generally less than 1% for most banks.

But beware the small print

When picking an appropriate savings product, you should first check a couple of things. How long will the bank pay that rate for – many accounts are limited to some time in 2010? Is there a maximum or minimum balances? How often will they allow you get access to your money – is it days, weeks, months or years? Do you have to make regular minimum deposits – some let you save €1 per month, others want €100? Are there interest bonus’ or penalties  – either extra interest to leave your savings there, or penalties if you stop saving early?

Show me the regular money!

I think that the best way to build up the rainy day nest egg is to save a little amount regularly – and preferably to have the money taken straight from your account as soon as your salary is put in. That way, you don’t get the chance to spend it on something else.

Therefore, a Regular Saver account is the account to go for. If you had an SSIA, it’s almost the exact same concept, except this time there’s no free money from the government.

The best rate available at the moment is the Family Saver Account from the EBS that pays 5.1%. Next best is the Regular Saver account from the AIB that pays 5%. The worst accounts just pay 1%. If you’re saving €100 per month, that’s almost an extra €50 in your pocket (before DIRT tax).

More interesting

If you’ve got a bit of money put away already, and you want to try to earn a bit more money, you could lock away the money for a bit longer – but remember, the longer the term, the less easy to get at it in case of an emergency.

The best rate for a 6 month deposit is 4.07% with Investec. They also provide the best 1 year rate at 4.5%.

And try as we might, even when it comes to earning interest on our savings, the government will still take their chunk. For most of us, DIRT tax means they’ll take 25% of our interest as tax. This was only 20% back in November before the budgets kicked in.

More Interest, less Tax

There are ways to avoid paying this DIRT tax.

You don’t pay DIRT on the money you make on your savings with the Credit Unions. But, the money you earn from a credit union isn’t treated as interest – instead it’s considered a dividend – or income. So, instead of paying DIRT, you must declare the income and be taxed on it.

For most of us, the main way to avoid DIRT means investing with the An Post through their Savings Certificates or Savings Bonds. These are longer term savings of 3 or 5.5 years so you’d need to be sure you won’t need the cash in the short term. The interest paid is equivalent to 4.3% and 4.7% respectively.

If you’re over 65 and meet certain criteria, you’re not liable to pay any DIRT on your savings interest. Also, if you’re a person with certain disabilities, you don’t have to pay DIRT tax either. The Revenue.ie website will provide further details on whether you have to pay or not, and how to go about getting refunds if you are paying but shouldn’t be.

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