John Lowe: The Money Doctor

Investments >> Cash

Would you like to have plenty of spare cash – sitting in a convenient bank account – for when you need it? 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.

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. 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. SSIA )

  - Your employer may have a ‘payroll deduction’ scheme, which could be worth investigating.

  - If you have any extra income, for instance, child allowance from the state, you could consider saving all of this on an automatic basis.

  - 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.

1.The level of interest 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, Bank of Scotland (Halifax) offer 3.75% on their demand deposit account up to € 10,000. Anglo Irish Bank plc – now nationalised and possibly the safest deposit-taker in the country - offer 3.1% interest on a demand account up to € 100,000 as well as 3.5% for a 12 month fixed account These compare very well when you consider some financial institutions pay as little as 0.1% on deposit and 0% on current accounts. Don’t be lured in by brand names such as Bank of Ireland’s Golden Years or National Irish Bank’s Midas Gold accounts – they offer little interest on these accounts. An Post offer 3% on a 30 day notice account.

2. 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. They will charge you a penalty if you don’t provide such notice, which could wipe out any interest you have earned. One idea is to keep some of your savings in an ‘instant access’ or demand account and the rest in a ‘notice account’ or fixed rate account.

3. The amount of tax you will have to pay. The only tax-free options available are from An Post. You could consider, for example, their Prize Bonds, Savings Bonds ( currently offering 10% tax free for a 3 year fixed term ) and Savings Certificates offer competitive, tax-free returns. Once you have a lump sum, an An Post should be considered. Otherwise the government will automatically claim Deposit Interest Retention Tax (DIRT) at 25% on your interest. However, if you are not liable for income tax, if you or your spouse is over 65 years of age or you are permanently incapacitated then you are 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, building societies and credit unions are, of course, the obvious place to build up a cash reserve. Credit Unions, with their longer opening hours, can be more practical for their customers plus whatever monies are invested can allow borrowings up to 4 times that amount for the depositor.

Demand, Notice & Fixed Deposit Rates