Surviving Inflation: How to make your money work harder and go further

Bank, Post Office & Credit Union Savings and Deposit Accounts offer a range of options from instant access accounts with a variable interest rate to accounts that offer a fixed rate of interest over terms of up to 10 years. At present, the one thing that all of these accounts have in common is that even the best of them offer pitiful interest rates of less than 1%.

The real rate of inflation in Ireland is currently running at around 8%, according to the latest CSO figures. This means that people’s savings are being eroded in value by over 7% per year. So, if you had €100,000 sitting in a deposit account for the last 12 months, its purchasing power today is 92% of what it was a year ago. By leaving your money sit in a deposit account it is literally wasting away.

How can I prevent my money from losing value to Inflation?

To try to keep pace with inflation, savers need to identify options that offer higher returns for their money. The best option is to save through an investment account using a life company plan. This will give you exposure to a wide spread of asset classes such as equities, bonds, property, commodities etc., and will give your savings the potential to generate much higher returns than if they are left sitting in a bank account.

These plans can be opened by way of a lump sum whereby you can contribute amounts typically in excess of €10,000 or regular savings account whereby you save as little as €100 p/m. By saving through this type investment account your money has far greater potential, over time, of outpacing inflation and maintaining its real purchasing power.

Things to consider when looking at your savings and investment options

1) Timescale: what kind of timeframe do you have in mind for your money? Will you need access to the funds in the next 5 years?

2) Inflation: as mentioned above, with inflation soaring, if you leave your savings sit in a deposit account it is guaranteed to lose real value as inflation increases.

3) Regular Review for the following reasons:

(a) Your investment fund might not perform as expected so it is important to check in and keep an eye on how the fund is performing every so often.

(b) Changing circumstances may influence how you invest your money. Depending on your situation as the years go by you may find yourself with more (or less) cash to invest.

(c) Your risk profile may change as you get older.

Savings and Investment plans are currently subject to 41% exit tax on any gain made. Even with that level of taxation, your savings are still better off in an investment fund than a bank deposit account. Tax rates are subject to change during the term of your investment

One way to avoid this tax is to save through a pension, although your money will be tied up until you retire. However, given that contributions can be offset against income tax, all gains made are tax free and at retirement you can draw 25% of the fund (subject to limits), nothing compares to a pension plan for tax efficiency.

What is ‘Real Rate of Return’?

The real rate of return is what you earn on your investment after adjusting for inflation. This is the true measure of how much your money is actually growing or reducing. For example, If the interest rate on your bank account is 0.1% (Ulster Bank average) per annum and the inflation rate is 8% per year (average for Ireland in 2022), the true value or purchasing power of your money will decrease by 7.9% each year!

Can I invest in the stock market myself?

Investing in the stock market using trading platforms such as DeGiro or Trading 212 is an option if you have a keen interest in the stock market and are willing to put hours of research into it. We have all heard rags to riches

stories especially, since the emergence of cryptocurrencies but the reality here is that a very small percentage of investors are consistently generating decent returns.

Without the proper research, guidance and discipline it is easy to get caught up in whatever investment craze is popular at the time, making it difficult to generate decent investment returns.

A financial planner can help you invest your money in a way that meets your specific goals. The life assurance companies who provide investment plans have a team of well qualified investment managers who design and manage funds for the client. They also provide guidance and support during difficult times in the market.

The Bottom line

Inflation is like a thief in the night, taking away your hard-earned cash without you even knowing it. By understanding how inflation works, you can take steps to protect your finances and make sure your money is working for you.

As highlighted above, the best way to protect your money from inflation is to invest in assets that have a higher rate of return than the rate of inflation. This way, your money will grow at a faster rate than inflation.

If you’re not sure where to start, we recommend scheduling a free consultation with one of our financial advisors at McGuire Liston. We’ll help you to find the savings and investment options best suited to your individual needs.

Whatever you decide to do, do not delay. Act now to protect your money.

Warning: Past performance is not a reliable guide to future performance.

Warning: These figures are estimates only. They are not a reliable guide to the future performance of this investment.

Warning: If you invest in these funds you may lose some or all of the money you invest.