Household deposits in Ireland stood at €135bn at the end of September 2021. This leaves us scratching our heads a bit… This money is earning no interest, in some cases negative interest rates are applied and the value of this money is falling as inflation reappears in the Irish economy. Money sitting in a bank account is making people poorer. So why are deposits at record levels?
There’s no doubt that some people are completely risk averse and see deposits as risk free. Yes they are guaranteed up to €100,000 in each institution, but they are also guaranteed to make you poorer in the current zero interest environment with inflation gathering pace.
Other people may have had poor experiences with investments before the financial crash, others may like to know they can access their cash at the drop of a hat. For others, it’s down to inertia – the money’s fine in the bank and it’s too much hassle to move it (tip: it’s not difficult at all). We recognise some of these reasons for holding cash, but surely there has to be a better way?
There’s no doubt that an emergency fund that is immediately accessible in a case of crisis is a very valuable asset. Deposits can make sense here, or indeed if you have a very short time horizon before using the money. But these reasons often don’t require placing all of your money on deposit where it will earn zero or negative interest rates.
Inflation was forecasted at 1.5% – 2% for 2021 and the same again for 2022. This is the silent killer for deposit holders, reducing their purchasing power and making them poorer as their money sits on deposit earning no interest.
When we advise people regarding their assets, we always come back to diversification and not having all your eggs in one basket. Deposits play a role in most investment strategies, but so potentially do other asset classes such as property, equities, bonds etc.
A carefully crafted investment strategy considers your time horizon, your appetite and capacity for risk, and the broad range of asset classes available to you. The goal is to create a strategy that will enable you to achieve your investment objectives, while living within your stated risk parameters.
So what do you do, because no-one wants their wealth to just dwindle away?
We think that you start by deciding what you want your money to do, what your actual objectives are. When you’re clear about these, have a chat with us. We’ll help you to clarify your timeframes and your attitude to risk. Then we can come up with a plan to help you achieve those objectives. The plan may well entail some of your money remaining on deposit.
However, going forwards your assets will be aligned with achieving your own stated objectives. This beats watching your wealth drain away in the bank.
Article first produced on PPS Monthly March 2023 Newsletter.