It is commonly believed that putting money in the bank is a risk-free option. But the truth is that keeping all your savings in cash does sometimes carry risk.
If you have all of your assets in cash, consider the following questions.
How secure is your cash?
Irish banks and credit unions aren’t bulletproof, as the recession has shown. Fortunately, if your bank or credit union collapses, the government will reimburse your deposit up to €100,000.
As a result, the first guideline is to hold no more than €100,000 in one bank institution.
Keep in mind that the restriction applies to the overall amount in your current and deposit accounts, not to each individual account. If you have a substantial cash deposit and don’t want to invest it, you should at the very least distribute it over many institutions.
Keep an eye out for introductory pricing
Banks will occasionally advertise eye-catching interest rates to entice new customers. However, these rates are frequently reduced to near-zero.
Also, don’t forget that interest rate arrangements alter over time. It’s always a good idea to examine the current rate on any account that used to pay you good interest.
The value of your cash holdings is being eroded by inflation
Inflation is now again on the rise. Because interest rates are so low, it’s practically impossible for your cash deposits to keep up with growing prices.
Your interest is then taxed at a rate of 32% before you see it.
Any interest owing to you is taxed before it is paid to you under Ireland’s deposit interest retention tax (Dirt tax) regime.
Inflation diminishes the value of your money, which is one of the main reasons to invest in assets with room to expand.
While the exit tax on investment fund profits is slightly greater at 41%, it is only charged once every eight years or when you sell, gaining compound interest during this period.
Is it possible that you won’t be able to access your money?
Banks place a slew of limitations on your cash access in exchange for a smidgeon higher interest.
A ‘notice’ deposit account, for example, will usually demand 30 or even 90 days’ notice before you may withdraw your money. Term deposits might force you to put your money down for anywhere from three to seven years.
If you’re keeping this money as an emergency reserve, this isn’t going to help you.
Other accounts limit the number of withdrawals you can make each year. It’s always worthwhile to read the fine print.
Holding money in a liquid investment fund is more accessible these days. Start with a lump sum, and add to it on a monthly basis.
For a long time, money has been going nowhere
Savings have been subjected to a ten-year interest rate drought, which is unlikely to end anytime soon.
However, not all money is idling away. During the same time span, investment funds have consistently increased the value of their investors’ money.
Cost of opportunity
Other assets are accessible in addition to cash and property. Above all, there’s the cost of not investing an excess of money in a more productive asset if you leave it in cash.
Investing a portion of your capital allows you to diversify your exposure to growth in different locations (such as the United States and Asia), industries (such as technology and healthcare), and asset classes (from company shares to bonds, commodities and alternative assets).
Investing offers a significantly larger long-term growth potential than keeping money in the bank.
Cash, without a doubt, has its place, and achieving the correct balance between investing and saving is unique to each individual. You may lessen the dangers of leaving your money in the bank by carefully investing a portion of your wealth.