Since the economic downturn in Ireland, it has become almost impossible to get a worthwhile return on a savings account in a retail bank. The main reason for this is the Irish government’s move in 2013, to raise the level of DIRT (Deposit Interest Retention Tax) to 41%. This meant that if you were making any interest on your principle sum, you would now surrender almost half of it in tax.
If you saved €10,000 in an account which paid 2% interest annually, your total would be €10,200. Apply dirt of 41% to the interest and you are left with just €10,118 after a year of saving. The low rates on offer from the banks are no help to start with either.
The above example is a common scenario that plays out between regular retail banking customers and some of the most well-known retail banks in the country every day. In this situation, it’s hard to say with a straight face that it is worth saving at all. However, a more true statement would be “it might not be worthwhile saving with traditional banks, but it is very important to save”.
Reasons to Save
From an Irish perspective, one of the main reasons to save is to put together a deposit for a mortgage. This has become an increasingly difficult for first time buyers in the country, as recently as this year, because of new rules surrounding mortgages that were introduced by the Central Bank of Ireland.
Those buying a house at a cost of up to €220,000, need a deposit of 10%, while those looking at properties over this amount will need a deposit of 20% plus 20% of the excess. This means that for a €240,000 property a person would need €22,000 plus 20% of €20,000 (€4000) ringing up a total of €26,000 before a single monthly mortgage is paid.
Furthermore, the rules introduced a measure that set a borrowing limit of 3.5 times the gross incomes of the buyer. Although many believe that these new rules completely squeeze first time buyers out of the market, others suggest that it gives a greater incentive to save.
This example of saving for a mortgage deposit in Ireland, gives great insight into the minds of Irish savers.
Better Ways to Save
When facing a savings challenge, like a mortgage deposit, third level college fees, or a child’s wedding etc., it’s a good idea to use a tool such as a budget calculator to best asses the savings journey you are about to embark on.
By examining one’s leisure, household and other financial obligations, and comparing them against a person’s income, it’s possible to get a fine tuned look at a person’s financial situation and see what adjustments need to be made to help achieve savings goals.
Once you have a better understanding of your finances and know what funds you have to save, you should start looking at savings specialists away from your retail bank to see what they can offer you in the way of returns.
Specialist institutions will allow you to start your savings with lump sums and offer a variety of accounts to satisfy savers with different attitudes to risk, and different expectations on return.
Saving with these institutions will no doubt continue to be a popular choice for Irish consumers as they still offer competitive interest rates and do not mimic the low rates that are currently on offer in retail banks.