I am talking about a bank account with sufficient funds to ensure that you can pay for unexpected expenses, extra purchases or emergencies without having to think twice? A bank account, for that matter, which you could use to take advantage of any hot investment opportunities that come your way?
One of the most important methods of ensuring your long-term financial welfare is to create a cash reserve. Not only will it serve as a safety net, but it will also speed up the whole process of building up your wealth.
Without a cash reserve you will always be vulnerable to:
- Large, irregular bills - such as maintenance on your home or car.
- Any fall in your income - whether due to illness, unemployment or for some other reason.
- Any increase in expenses – perhaps because the cost of borrowing has gone up - rates now can only go one way
With a cash reserve, on the other hand, you will be financially invincible. You won’t have to borrow unnecessarily (which could be a huge drain on your future income) and – once your cash reserve reaches an appropriate level – you will free up money for more lucrative investment purposes.
What is an appropriate level for a cash reserve?
This will depend on your personal circumstances. If you are single and in your twenties or early thirties with low overheads and no responsibilities, for instance, then you probably only need enough cash to cover, say, three months’ worth of expenditure. On the other hand, if you are married with children, a mortgage and a car to run you should probably aim to build up as much as six months’ expenditure.
If you don’t have a lump sum available to put into your cash reserve then the best thing to do is to establish a pattern of regular saving each week or each month. You can only really do this by doing a monthly budget analysis. This way you can work out how much it costs to run your household on a monthly basis and importantly if you have a surplus that you can save. Remember, something is better than nothing – even if it is a relatively small amount it will soon add up. Saving this way is something many people mean to do, but just never get around to.
Here are some tips to help you:
- Saving can only be achieved by conscious effort. You have to make a decision to save regularly and then put your plan into action.
- You should open a savings account somewhere convenient (I’ll make some suggestions in a moment) and arrange to make regular payments into it.
- One of the best ways of saving money is to set up a standing order from your current account into your savings account (e.g. Regular Saver Accounts - RSA)
- Your employer may have a ‘payroll deduction’ scheme, which could be worth investigating.
- If you have any extra income, for instance, child benefit from the state, you could consider saving all of this on an automatic basis if you can.
- Before you begin decide under what circumstances you will use your savings and don’t touch them for any other reason. Your savings should be sacrosanct.
Incidentally, if you are in a permanent relationship then ideally you should both have access to your cash reserve. If something happens to one of you, then the other may need to use this money.
When deciding where to build up and keep your cash reserve, there are three things to consider.
- The level of interest on demand accounts you will be receiving. It is well worth shopping around as rates vary enormously. At the moment some of the best rates are available from telephone-only, internet-only or telephone-and-internet-only accounts. For example, Rabobank (www.rabodirect.ie) which is offering 0.6% (over € 50K it’s 0.2%) and KBC Bank (www.kbc.ie) which is offering 0.7%. The latter have also physical branch and broker presence – open a current with them and they offer the best RSA rate at 3.5% - saving between € 100 and € 1000 per month for up to 12 months.
- The level of access you have? You must be able to get your money easily when you need it. Many financial institutions, however, will offer you a higher return if you agree to give them notice when you plan to make a withdrawal. For instance, if you give them 30 days notice or even 90 days notice. Longest term deposit? The National Treasury Management Agency (NTMA), a government body who manages all government funds, offers 16% tax free on their National Solidarity Bond (NSB), part of the State Savings…but you have to leave it there for 10 years. They will charge you a penalty if you wish to take out some or all of the investment (minimum € 500 maximum € 120,000 per person) on 7 days’notice, which could wipe out the interest on that amount withdrawn. One idea is to keep some of your savings in an ‘instant access’ account and the rest in a ‘notice account’.
- The amount of tax you will have to pay?
The only tax-free options available are from NTMA via An Post offices and online. You could consider, for example, their Savings Bonds or Certificates along with the NSB which may also be appropriate. Otherwise the government will automatically claim Deposit Interest Retention Tax (DIRT) at 41% on your interest. If you are a higher rate taxpayer you may also have to pay PRSI. However, if you are not liable for income tax, if you or your spouse are over 65 years of age or you are permanently incapacitated then you may be entitled to claim back DIRT. What’s more, you can make a back claim for DIRT tax for up to six years. To reclaim DIRT ask for a form from any larger post office, bank, building society or tax office.
Banks, credit unions and post offices are, of course, the obvious place to build up a cash reserve. Credit unions and post offices offer that little more personal service than banks and may be a better place to bring your 7-year-old and older children to open that account and be made a fuss of!
Whatever you do about savings? START!
John Lowe, Fellow of the Institute of Bankers, is founder & managing director of Providence Finance Services Ltd trading as Money Doctor and based in Stillorgan Co Dublin. He is author of The Money Doctor 2016 – 100 Ways to Save Cash (Gill ) Tel +353 278 5555, email firstname.lastname@example.org or web www.independentfinancialadvice.ie. Follow John -Twitter(@themoneydoc) Pinterest,Google+, Linkedin & Facebook