My 8-year-old daughter recently made her communion. She was allowed to keep a certain amount of money to buy something for herself in Smyths, but the remainder we planned to put into the Post Office, as we had done with her 14-year-old sister’s stash at the time.
A 10-year bond that would mature just in time to pay for her Leaving Cert holiday. Great planning. Or so I thought until I saw the rates the 10-year solidarity bond is currently offering. 1.5% AER. 16% total return. So after 10 years €1,000 would be worth €1,160.
Does this matter? Well yes, it does matter when inflation is running so high at over 7%. Because money not keeping up with inflation is losing money year on year for the saver. Simply put, she won’t be able to pay for that Leaving Cert holiday if this is where we leave her money for the next ten years.
According to the CSO, the Covid crisis saw a surge in savings with an extra €16 billion in savings on deposit up to May of 2022, with households putting €1 aside for every €4 they spend. Anecdotally, we have never seen our customers with as much money on deposit.
As a Financial Planner, the investment conversation has now, with this very high level of inflation, become a more urgent part of the overall financial discussion with our clients. If we meet a client with €100,000 on deposit, we need to tell them unless they take action, that money will only be worth €93,000 this time next year. That money is losing thousands by what we call in the industry “the silent thief”, inflation.
So what can a client do if they have some money sitting and doing nothing in the medium term (5 – 10 years) and don’t want it losing value right under their nose?
Here are my 7 steps to taking care of your money and protecting its buying power.
Step 1. Emergency fund.
Establish what you need to access immediately. Financial planners will often say you need 5 months’ net pay at your disposal in the event of an emergency (car breaking down, replacing a white good unexpectedly, etc).
Step 2. 5 year plan
Once you have boxed off your short-term money, look at the balance, and if you can commit to putting it away for a minimum of 5 years, then it’s time to consider an Investment Bond for your money.
Step 3. Appetite for Risk
Complete a risk questionnaire with your financial planner. It takes approximately 10 minutes, it’s 15 questions, and it gives us an indication from a scientific standpoint around your appetite to risk on a level of 1 being low and 7 being high. The advisor can compile a report and walk you through the findings.
Step 4. Recommendation time
From there the advisor can walk you through the options on the marketplace, asking you key questions about your objectives for your money and making a recommendation that is tailor-made for what you want. You ideally want to deal with an Authorised Advisor. What that means is the Broker isn’t tied to any one particular company and has access to invest your money in any available Life Assurance company on the market. They work for you and not a particular bank.
Step 5. Devil in the detail
Key questions you need to ask around the small print are what are the charges? Specifically the allocation rate (what % of your money goes into your bond), and what is the annual management charge (the% of the pot the fund managers take to manage your money).
Other key considerations are what tax implications there are, can you top up your account, can you access a % of it and when, and finally what happens to the money if you die.
Step 6. Set up your policy
Complete the necessary paperwork (your broker will give you a checklist) to set up your Investment bond.
Step 7. Review and enjoy.
Review annually with your advisor and make any necessary investment fund changes. At maturity enjoy the fruits of your investment and use it for your original goal.