Ifac provides financial planning advice to Cork deposit holders

HOUSEHOLD deposits surged by €14bn in 2020. The Central Bank reports that they are now at record highs of €125bn as Covid restrictions significantly dampened spending habits.

But the recent news for deposit holders has not been good.

State savings products have seen significant reductions in interest rates. Prize Bonds receive no interest but instead are involved in a draw with the prize pool reduced.

Ulster Bank and KBC are exiting Ireland, leaving customers wondering what to do in an ever-decreasing market. Bank of Ireland has announced the closure of branches and has widened the range of customer deposits where negative interest rates apply. Credit Unions are being charged negative interest rates by banks and therefore have imposed savings caps on deposit accounts. Interest rates between 0.0% to 0.05% are common on many accounts.

All this news should prompt deposit holders to reflect and review their options. But what to do?

Step 1 - Rainy Day Fund: One clear advantage of deposit accounts is the ability to access funds quickly. Holding money for the ‘rainy day’ or emergency makes sense. How much you hold depends on your personal preference. As a guideline, we recommend at least three months’ income.

Step 2 - Planned Spending: You also need to able to access funds for planned expenditure such as changing your car, home improvements, a wedding, or college fees — expenditure likely needed over the next 2-4 years.

These two steps ensure that you have the right money set aside for the expected and unexpected. The priority is access, not growth, so do not fret too much about the interest rates. Now, what to do with the balance if left over.

Repay debt: Start with credit cards. With interest rates ranging from 17% - 23%, it makes sense to clear these. It is like your deposit money has earned the level of interest rate applying to your card.

Personal loans incur interest rates of 6.5% to 8.5%, so they are worth a look also.

The same applies to the mortgage. What interest rate are you being charged? Does it make sense to clear down all or a portion of this loan?

A key consideration when repaying debt is that the money you repay is gone. You no longer have access to it. If you need to apply for a loan or mortgage in the future, how confident are you that you will receive the funds?

Investing: Explore growth opportunities for the deposit money that you do not plan, or want, to spend in the short/medium term.

When assessing your investment options, it is important to get the correct balance between the growth you want and the level of risk you are comfortable taking. Beating inflation and maintaining the real value of your funds is one of the main goals here.

If you are considering investing, I would strongly recommend that you talk to a financial advisor. A good adviser will assess your risk appetite by looking at your ability, need, and tolerance for risk. This will help find the best investment option suited to your circumstances.

Make your savings work for you: Life is unpredictable so it’s important to keep your personal finances under review. Making your savings work for you can make a big difference to your financial security. Regardless of your circumstances, it makes sense to shop around for the best deals.