Why Should I Save
Everyone benefits from saving - even small amounts add up and help you to manage your money and cope with unexpected expenses and emergencies. It can also help you achieve goals, pay for the educational needs of your children or enjoy a holiday, new car or home improvements. In the short term you should focus on security but long term you should aim to earn a return on your money which will help you beat inflation and make your money grow in real terms.
Where do I start
Firstly, you need to decide how much, if anything, you can afford to save. Look at your earnings, what you spend and what you owe on any loans. Paying off short term expensive debt should be a priority.
Decide your savings goals
You need to decide what you want to save for. Usually, most of us have a mix of short-, medium- and long-term goals when it comes to saving. (eg, holiday, car, emergency fund etc)
Think about your attitude to risk
There are three main types of risk to consider when saving or investing:
• inflation risk;
• return risk; and
• capital risk.
Inflation risk is the risk that your money will lose value over time. Its buying power will go down as prices go up. Even a modest inflation rate of 3% means that €100 will be worth only €97 after one year. Over longer periods inflation has an even bigger effect. That’s why it’s so important to earn a return on your savings. Even a low level of return, such as on a savings account, helps your money to hold its value. Of course, you need to earn more than the inflation rate to get a real return on your money.
Return risk is the risk that your money will not grow as much as you expected. Some savings products give you a fixed return, others don’t. Investments linked to the stock market generally produce a higher return than savings accounts, but the return you get is difficult to predict and can rise and fall from year to year, sometimes quite dramatically.
Capital risk is the risk that you could lose some of your original investment (capital). You may ask yourself why take this risk? The answer is, generally you have to risk some of your money to get higher returns. If you don’t want to risk losing money, you will usually have to settle for lower returns based on deposit-type accounts or products which can guarantee your original investment. Before you make any investment decision:
• be aware of any risk to your original investment –how much could you lose?;
• understand how this loss will affect you, particularly if you are older or your income is uncertain; and
• make sure you are aware of and comfortable with the level of risk you are taking on.