Can Ireland’s shock savings be put to good use?

Can Ireland's shock savings be put to good use?
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Limited spending options and fears of what was to come made Irish consumers big savers during the pandemic lockdowns.

Even as the economy reopened, the average household was saving far more of their income than before – although recent data suggests rising prices are forcing this to change.

This means there is a huge amount of money in Irish bank accounts right now – at just a time when households, businesses and politicians are looking for ways to meet the rising cost of living.

How much money have people saved here?

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A huge sum – in the order of 146 billion euros by the end of July, according to the latest figures from the central bank.

For comparison, the upcoming budget is estimated at around 6.5 billion euros – and that is a much larger figure than in a normal year, because billions of euros are earmarked for living expenses.

So the people of Ireland have more than 22 bump budgets of cash in their bank accounts right now.

And that number has risen significantly over the past two and a half years – because people have saved extraordinarily well during the pandemic.

Comparing the February 2020 figure to the July 2022 figure, our savings are almost €35 billion higher. That’s the kind of money that would normally take a decade or more to build.

It accounts for approximately €28,600 for every inhabitant in the country.

But I don’t have anything like that in my bank account…

Unfortunately, all the money is not distributed very evenly.

And unsurprisingly, it’s the country’s higher earners who tend to keep most of the money saved.

It should be said that most people in the country have some level of savings – recent figures from the National Statistics Office say that almost 97% of households have some form of savings.

But the amount in these savings accounts tends to decrease with the level of a person’s disposable income.

There are also associations between the likelihood of having savings and your level of education and whether someone lives in their own home or rents.

And this inequality in saving has only been exacerbated by the pandemic.

If you took two types of workers – let’s say a high-earning technician and a regular retail worker.

There is already a big disparity in income here – but when the pandemic hit, the technician was able to continue his work from home with virtually no interruption.

This means their earnings stayed the same, in some cases even increased, and with nowhere to go, all of their welfare money suddenly started accumulating in their bank account.

The retail workers wouldn’t have had much disposable income to spend their money on, either, but because they were forced to quit work altogether and switch to pandemic unemployment benefits, they didn’t have much disposable income once the bills became done.

Are we still saving our money?

As the economy began to reopen, there was much debate about what might happen to all the savings accumulated during the peak of the pandemic.

There were some – retailers in particular – who were hoping there might be some sort of post-lockdown spending spree.

Consumer spending increased – and some people seemed to be using their savings for some big ticket items, like a trip abroad. Part of the rapid rise in property prices has also been attributed to people using their savings as a down payment on a new home.

But while spending was higher than before, it definitely wasn’t the squandering some expected.

In fact, so far it seems like people have continued their saving habits even as life has returned to normal.

The latest household savings statistics from the CSO show that people were still putting away almost 20% of their income at mid-year.

That’s about double the pre-pandemic average.

Perhaps people have realized that they have been able to save more than they previously thought possible – or perhaps it shows that households remain cautious, particularly amid war in Ukraine and talk of a recession in the eurozone.

It should be said, however, that these CSO numbers only get us through June — before the cost-of-living crisis really started to bite.

A recent Bank of Ireland survey shows people are now saving less than they think they should because they simply can’t afford it.

So if we don’t spend it, what are the options for savers to get the most out of their money?

Well, if you want to save it – there’s not much on offer at the moment.

As a rule, savings accounts offer hardly any interest – and this has been the case since the European Central Bank lowered the key interest rate to zero.

ECB interest rates are rising, but so far the main Irish banks – apart from tracker mortgages – have not passed them on yet.

That’s good news for those with an adjustable-rate mortgage or personal loan, but it’s bad news for savers because it means they aren’t benefiting from interest rates yet.

Of course, for those looking for a return on their money, investing is an option — but only if you have a sum of money you’re happy to put out of reach for a few years.

And unlike savings, investing isn’t guaranteed – so you could end up losing money or not making very much.

Generally speaking, things like this are about balancing risk and reward – if you want the best chance of a great return, you need to make riskier investments.

If you want to be sure you’re not losing money, you need to go for something that promises fairly modest returns.

Take, for example, a 10-year national solidarity bond – which is 100% guaranteed by the state.

Invest €1,000 today and get back €1,100 in 10 years.

And with the current inflation rate…

That’s the problem facing all savers right now – they’re getting little or nothing for their money, and the value of that money is being diminished month by month.

For example, if you put that €1,000 in your savings at the start of the pandemic, it is now effectively worth less than €890 in terms of purchasing power due to inflation.

The inflation rate is expected to ease over the next year or two – but it will still be higher than desired, meaning your money will slowly lose value while it gives you nothing.

So what other options do savers have?

Well, they could spend the money—although due to inflation, there’s not much value to be had, especially if they’re thinking of doing something like a home renovation or upgrade.

People may also be reluctant to give up their savings right now, for fear of having to draw on them if their household budgets are squeezed even further or if another economic downturn threatens their incomes.

And the general personal finance advice is to always have a certain amount of cash on hand in case your income suddenly drops or the washing machine breaks down.

So it’s not a good idea to use up all your savings anyway.

But provided you have money in excess of this recommended buffer, paying off debt right now is probably a good use of money, especially if it’s high-interest borrowing like a credit card.

The latest central bank statistics tell us that household debt was €128 billion at the end of last year – not too far behind what we saved.

If people have the money to pay off part of it, it can mean cutting or even eliminating a loan repayment altogether, which will boost their monthly budget as they head into the winter.

Even if you’re only paying off part of a loan—like your mortgage—it will ultimately stand for you.

Another option is to invest money in retirement.

For many this is an investment for as long as possible, but we know that a lack of pension provision is a major problem in Ireland and it takes a long time for people to build up some sort of pension pot that they want to have a comfortable retirement.

Is there a way for the government to take advantage of these savings?

Well, it does — for example, all interest earned is subject to the 33% Deposit Interest Retention Tax — or DIRT.

Given that people haven’t made much from their savings in recent years, there really isn’t much money to be made from this tax at the moment.

The federal austerity program, including things like the National Solidarity Bond and Prize Bonds, is an effective government attempt to cash in on people’s savings as well.

This is because they effectively provide a way for the state to borrow citizens’ money for an extended period of time, which they can then use for various investments and public services.

Beyond that, however, the government is actually a little tight when it comes to people’s savings.

When you’re looking at companies across the country that are struggling on the one hand, and billions upon billions in savings accounts on the other, it usually makes sense to devise a plan to try and free that money to help businesses out.

Imagine a kind of reverse SSIA system that encourages spending rather than saving.

But if you did, you risk only adding to the inflation problem right now – which would only prolong the pain consumers and businesses are currently facing.

Counterintuitive as it may seem, the government probably doesn’t want too much money pouring into the economy right now.

That’s partly why a central bank will raise interest rates when it wants to cool economic activity. Because higher interest rates on your savings account – at least in theory – encourage you to save rather than spend.

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