Inflation's Impact on Savings: What You Need to Know
Irish savers are a dedicated bunch, with the majority keeping their money safe in banks or credit unions. However, a closer look reveals a potential issue: over half of these savers are earning less than 1% interest on their deposits.
With inflation soaring, driven by rising food and energy prices, more than half of savers' cash is losing value in their accounts. Despite saving around 12.8% of their disposable income this year, according to the CSO, the average household is facing a decline in purchasing power.
The Central Bank's research highlights a concerning trend: Irish households' preference for shorter-term, more accessible deposit accounts costs them almost €800 million in unearned interest annually. Financial Planner Leah McMahon emphasizes the importance of financial planning, warning that lack of organization can lead to money sitting in accounts with minimal returns.
Inflation is creeping up, eroding the spending power of savings. Most people opt for instant access or demand accounts with low interest rates, ranging from 0.01% to 3%. However, food-price inflation outpaced general inflation, rising by 4.7% in the year to September, meaning your savings may increase, but what they can buy decreases over time.
The European Central Bank's rate cuts haven't helped savers either. With interest rates falling, savings accounts and investments are suffering. The best savings rate available is around 3%, but it's lower for those saving more than a couple of thousand euros monthly.
The lack of competition in the Irish market means similar rates across institutions. Switching accounts is time-consuming and involves paperwork, and many fear missing direct debits. However, it can be worth it if you do your research.
Irish savers can explore other European banks for potentially more competitive rates. Savings in Irish banks up to €100,000 are protected by the Deposit Guarantee Scheme, but tax implications for interest earned in other EU countries should be considered.
Gen Z is more inclined to invest in ETFs, with a third of Revolut customers in Ireland favoring stocks and ETFs over property for long-term wealth building. Financial Planner Leah McMahon advises caution, as trading platforms come with fees and risks.
To beat inflation, diversification is key. L&G's Richard Kelly recommends a broad investment approach to mitigate risks and achieve smoother returns. Prioritize savings, pension, and investment, ensuring you have cash for day-to-day expenses.
