It is fierce common lately to hear the financial industry give out about the rates of interest available through bank deposit accounts and to recommend that you should invest your money into XYZ Fund (which just so happens to generate a nice chunky commission for whoever is doing the recommending!). It’s funny, they weren’t saying the same when equity markets were falling 30% per year and deposit rates were up at near 5% per year! (although they should have been!)

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A Body Loses Power:

Before we get into the nitty-gritty we’d love to try draw a parallel to what we are talking about here! In today’s world lots of folks are big on fitness, of maintaining a healthy body. When we exercise and strain we will be tired afterwards but our muscles will recover and grow. If we keep doing this our bodies retain their strength, they even get stronger over time. If we do not exercise we get weaker, we lose our ability to do certain things, we lose power. The very very same can be said of our money! If we do not exercise it, if we do not challenge it, let it suffer, and let it recover and grow, it too will lose power……..keep that in mind as we go through this short piece!

Should I Invest My Money?

The first thing that is probably worth considering is why you want to invest at all! Here at Informed Decisions we suggest that nothing should happen until there is a plan, some recognition of what your your desired outcome is, only then will a suitable course of action, and a measure of success be evident. If you are merely chasing the best return you can get then it is likely to fail at some point in the future as you jump from option to option, which is rarely successful. Without a clear plan one’s will usually fades in the face of some set-back or market turbulence or other minor and temporary event.

Before we slate the current rates on Deposit it is probably worth noting that deposit accounts are never a great place to keep long term cash sitting, if growth is your objective, they just aren’t. They are not designed for that purpose. From time to time the rates can be very attractive, as mentioned above rates hit 4-5% in 2009 but do not let those periods of high rates mask the fact that over the long term cash in deposits will struggle to stay abreast of inflation.

In essence if you retain anything more than your emergency & short term cash on deposit over the long-term you are losing purchasing power on that money that you cannot get back. The rate at which it is growing is slower than inflation (the price we pay for goods & service). You are losing money. I’ll repeat that, you are losing money! It is usually a (very natural) fear of loss that prevents investors from coming out of deposit into something which has a proven track record of long term growth (with some volatility) . More often than not they don’t realise or won’t accept the fact that unfortunately they are losing already.

Should I Keep Money On Deposit?

Deposit accounts serve a purpose, to hold cash which you may need to access at short term as a result of emergency, urgent need or a planned expense in the short term. It is nice when the rate you get is up at 3-5% however that is very rare occurrence. The current rate of deposit will see you getting approximately 0.3-0.6% before tax! After tax and it falls below the rate of inflation in Ireland (Ireland 2017).

Irrespective of the rate of deposit at a particular point in time, if you have been holding your life savings in deposit accounts for years it is always a good time to reconsider that approach. That is unless you are happy to accept the fact that you will lose purchasing power of your money over the long term. If you are willing to accept that lose as opposed to accept some volatility of another route then stay where you are, and don’t let anyone tell you otherwise.

How Can I Possibly Lose Money On Deposit??

It will hopefully be clear that we are not slating Deposit Accounts, they serve a purpose, however we also must acknowledge that over the long term the loss you suffer can be quite huge. According to the Central Statistics Office there are €100,000,000,000 (one hundred thousand million, or a €100 billion in other words!) in deposit accounts in retail banks in Ireland!! Much of that is surely justifiably there, the owner needs to keep it accessible for some reason, but the loss they face over the long term is colossal.

If you have €100,000 (for round figures) sitting in a demand deposit account or an account which is yielding close to zero percent interest after tax, you will lose 15% purchasing power over 8 years if inflation trends at 2% for that period. Basically you would withdraw that money in 8 years and your money would be worth 15% less than when you put it in 8 years ago! It would still say €100,000 on the bank draft but you will be able to buy 15% less with it!

If inflation were to trend at 3% per year for the 8 years, when you finally take it out to buy something (or pay for education or whatever you have it marked for) it will have purchasing power of just under €79,000. You will have lost 21% of your purchasing power over those 8 years. These are mathematical facts.

In Conclusion:

Irrespective of what interest rates do or don’t do the facts remain. When rates increase in the future the same overall facts remain. This is not just a problem when rates fall to almost zero as they have done in recent years, this is a problem even when rates eventually climb back up slightly.

If we do not exercise our bodies we will lose power. If we do not exercise our money it will lose power.

There are alternatives, and we will delve into those in the coming 2 weeks, but for now we want you to be open to the fact that over the long term you will lose purchasing power if you do not, after taxes and charges, at least keep up with inflation. Fact!

Thanks for reading and engaging folks!

Paddy Delaney

QFA | RPA | APA | Qualified Coach