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\n Paul O’Donoghue<\/p>\n
AS YOU MIGHT have heard by now, Irish people don\u2019t tend to invest.<\/p>\n
Instead, the population largely stuffs its savings into bank accounts, which is why there\u2019s about \u20ac175 billion sitting in deposit accounts.<\/p>\n
We\u2019ve covered previously<\/a> why this isn\u2019t the best idea. In short, these accounts pay out virtually no interest, which means the value of the savings erodes over time.<\/p>\n There\u2019s been lots of national angst about this of late, and it is one of the driving reasons why the government is setting up a new state investment scheme.<\/p>\n We don\u2019t know yet exactly how it will work, with the details expected to be announced<\/a> in the upcoming Budget.<\/p>\n Despite nothing yet being confirmed, the initiative has generated an enormous amount of public interest and media coverage.<\/p>\n It\u2019s understandable. After all, it\u2019s new and shiny. It could genuinely be a significant boost to households who have savings sitting in cash. And if properly directed, those savings could give a boost to indigenous businesses, such as those listed on the Irish stock exchange.<\/p>\n But the state investment scheme may not be the number one priority for the average man or woman on the street.<\/p>\n After all, a 2024 survey<\/a> found that more than half of Irish people have less than \u20ac3,000 in savings.<\/p>\n For those who don\u2019t have lots of cash on deposit, there are other areas of their finances where their attention may be better spent.<\/p>\n A basic outline looks something like this:\n<\/p>\n Deal with any high interest or immediate debt Let\u2019s run through some of that in more detail.<\/p>\n Emergency fund and buffer<\/p>\n First off, you of course want to make sure you\u2019re meeting your day-to-day expenses before even thinking of investing.<\/p>\n This means you can pay your mortgage\/rent, buy food, pay the bills and so on, and you\u2019re not short at the end of every month.<\/p>\n If you find yourself falling into the red, that has to be addressed immediately, whether that\u2019s by boosting your income or cutting your expenses.<\/p>\n Paying off any high interest debt, such as personal loans, should also be a priority.<\/p>\n But assuming you have some spare cash left before the next payday, what then?<\/p>\n Well, before looking at investing, most analysts recommend building up an emergency fund<\/a>.\u00a0Why? Because life can happen \u2013 redundancy, you need a new fridge, your car breaks down. If all your money is tied up in investments, immediate, unexpected expenses can become very hard to pay.<\/p>\n The CCPC, Ireland\u2019s consumer watchdog, recommends trying to build up savings that cover your basic living costs for \u201cthree to six months\u201d.<\/p>\n For someone earning \u20ac50,000 (about the median wage<\/a> for those working full-time), this would mean accumulating savings of around \u20ac10,000.<\/p>\n Pension<\/p>\n There is somewhat of an asterisk on that last point. For most people, building up to \u20ac10,000 in cash savings is a big goal, which will likely take time. What about your pension?<\/p>\n It is likely for the best to get a small buffer first, then start paying into your pension, and then work towards the \u2018three-month emergency fund\u2019 as a longer-term goal.<\/p>\n This is because pensions have a compounding effect. Essentially, money you put in earlier will get you a bigger return in the long run.<\/p>\n This is due to something called compounding. You can find more information here<\/a>. But the key takeaway is that you generally want to start paying in as soon as you possibly can.<\/p>\n The other big reason you want to do this is that in Ireland, paying into a pension is a fantastic investment.<\/p>\n If your employer offers a pension scheme with matched contributions, it\u2019s a no-brainer. Join and pay in enough to get the maximum employer payments. It\u2019s essentially free money.<\/p>\n However, many workers aren\u2019t so lucky and don\u2019t have an employer willing to contribute. It\u2019s for this reason that about two-thirds of the country\u2019s private workers didn\u2019t have a pension.<\/p>\n And this is why the Irish government started its automatic enrolment retirement savings scheme, known as MyFutureFund, earlier this year.<\/p>\n Encouragingly, only about 4% of workers<\/a> have opted out of the scheme.<\/p>\n Paying in is a good decision. To see why, let\u2019s go back to our worker earning \u20ac50,000 annually.<\/p>\n Under auto-enrolment, he pays 1.5% of his gross salary [\u20ac750] into his pension fund.<\/p>\n Under the scheme, his employer pays \u20ac750 as well, while the state pays \u20ac250.<\/p>\n Meaning that for \u2018spending\u2019 \u20ac750, the worker gets an additional \u20ac1,000 immediately invested. Of course, this can\u2019t be accessed straight away. It goes into your fund, and the idea is it will grow and compound over decades.<\/p>\n There are other ways to pay into a pension, such as through a PRSA (Personal Retirement Savings Account<\/a>). There are generous tax reliefs in place which means that, for many workers, every \u20ac100 contribution effectively only costs \u20ac60<\/a>.<\/p>\n No matter which pension you pay into, it\u2019s possibly the single best investment you can make.<\/p>\n If and when you build up a decent emergency fund, maximising your pension contributions will then likely give you the best bang for your buck.<\/p>\n Investments<\/p>\n It\u2019s only once all these boxes are ticked, that most people should consider additional investments.<\/p>\n Going back to the proposed state investment scheme for a minute. While we don\u2019t know the full details yet, you would have to generate absurd returns to match what\u2019s on offer via pension contributions.<\/p>\n For most workers, the MyFutureFund will likely be the best option. But let\u2019s even take the PRSA for a minute. Say you make a gross PRSA contribution of \u20ac1,000. The effective cost to you is \u20ac600, due to the 40% tax relief.<\/p>\n
\nBuild up a basic emergency buffer
\nStart contributing to a pension
\nAim to get your emergency fund to cover at least three months of living expenses
\nIncrease pension contributions as much as possible
\nIf you have spare cash after all this, then consider additional investments<\/p>\n