Someone said to me during the week that it was really not a good time to have money on deposit because interest rates were so low. And this was a bit of an understatement, and I suspect they made the comment after seeing what their return was, for money they had on deposit and after reading that Bank of Ireland I March plan to reduce it’s on demand deposit rate to 0%.

It’s actually not a big deal because if you had money in this particular account at the moment, the rate you are earning is 0.01% gross. So, if you had €10,000 on deposit in this account, the interest you are earning over 1 year after tax is €0.61 cent, so I don’t think 61 cent is going to make or break anyone.

It is, and has been for a number of years now, a terrible time to have money on deposit particularly for a certain sector of the population.  If you are dependent on getting an income from your savings to help supplement an old age pension for example, you would have seen your income from savings being decimated.

Not that long ago, if you went into your local An Post, you could secure a three year fixed, tax free rate of 10%. So, if you invested €10,000 then you would get back €1,000 in interest 3 years later, happy days. Now, if that same €10,000 was invested today, the rate is just 1%, and the interest earned therefore would amount to only €100. That is a 90% drop in what the return previously was. By any stretch, that is a massive drop.

You see financial institutions don’t have to lure savers with attractive rates anymore, when they can borrow money themselves on the cheap. Which is why we are now seeing rates as low as 0.01% on many accounts. And when you factor in inflation and DIRT tax, for hundreds of thousands of people it is actually costing them money to have it on deposit.

So what options are open to people who have money on deposit, but are unhappy with their current rate of return? And when I refer to options, I mean real options, not investing in fine art, wine, precious metals etc. so I am going to put forth some options that people can actually take action on themselves. 

The first option is for those who happen to have a mortgage.

And if you are, like a gentleman I met last week who had a variable rate mortgage where he was paying 4.2% and had 21 years left on his mortgage. If he used €30,000 of his savings and took it off his mortgage, the amount in interest he would have saved is €15,199. The test to make sure he was doing the right thing was to see what he would have got for this money on deposit over the same term. And the answer based on present rates was about €4,749.

So, this really was a case where he should use some of his savings to clear part of his mortgage, because he could get a better return by clearing it than he could get on deposit.

My second option is to do nothing, sit tight and hope rates increase in the next 12 to 18 months.

Yes you might be earning very little in the interim but you don’t want to commit and lock your money away for a long fixed period just to get a decent annual rate, which, could turn out to be very poor if, and when rates increase.

Another option is to invest in products that carry an element of risk.

You have probably heard of the old saying “the higher the risk the higher your return” and in some cases this can be the case. But you are risking your money and how would that feel if half or all of it was wiped out in the chase to get a better return. Is it worth the risk? Only you will know, but only ever risk what you can afford to lose, not, what you can’t.

Investing in shares/managed funds has a “doubled edged sword” – you can make lots of money if successful but equally you could lose it all if you are not.

How would you feel if for example you saved €20,000 and it was your life saving’s. It was hard, but you managed to save it. You then use this money to buy shares, and a few months later it is now worth €10,000.

You would obviously feel sick. It took you a long time to save this amount and then literally overnight it is wiped out. So, don’t invest in shares unless you can afford to take the lows with the highs.

Having said that, you can invest in accounts that have 100%, 95% and 90% capital guarantees that allow you to invest in the Stock Market as well, so you benefit when the stock market increases and you are protected if the market drops i.e. you are guaranteed to get a % of your capital back, a % that you determine from the outset. 

And this is a third option. There are some excellent accounts available at the moment that can be arranged in this way, which have and have produced excellent returns in the past. And when you look at the risk/reward strategy of investing in these types of account against investing in current fixed rate products, it just shows you how good these types of accounts are, and just how bad the others are.

For example, one particular account springs to mind where your money is invested in three different funds, and your capital is 100% guaranteed. If the funds return about 3% per annum as they have done in the past, then great, that is about 7 times more than you would get in the best account on deposit at the moment. And if they don’t and return nothing but you get back your capital, what have you lost out on? About €40 per year, if, you had it in an account earning 0.4%. And If you had  it sitting in one of those accounts earning 0.01%, then you are putting €1 at risk – you are taking a bigger risk I think by leaving it that type of account.

Why leave your money on deposit when you could use it to pay off debt?

And this is my fourth reason for doing something with money on deposit earning nothing.

Again, let me give you a real life example of a client of mine who owed €5,000 on her credit card, and was being charged a rate of 21%. If she invested the €5,000, at best she would have earned about €20 in interest over 12 months, if she continued paying back her credit card at 21%, the interest charged to her card each year would be €699, so it just didn’t make sense not to pay off this debt.

The big proviso however, was that she was not using all of her savings, she still had some “rainy day” money even after clearing her debt and that is important, don’t use all of your money on deposit to clear your loans, leave some because, it may rain at some stage, and you want to have that umbrella of savings.