The Value of Savings
Saving is an invaluable habit. It is a discipline which can be crucial to the achievement of our financial goals and preservation of our overall financial well-being. Saving may not always be an option, depending on what point we are at in life. However when you’re in a position to save, it makes sense to have an appropriate plan around this process. For short term savings you can of course utilise a deposit account. However for medium or more long term goals an action plan around your savings may be more advisable. A well balanced approach to long term saving, presents a great opportunity to build a fund. It involves getting your Savings working for you! Where you can invest your savings on a regular basis and take a certain amount of risk for the chance of long term reward. As outlined this approach is only appropriate for medium or longer term goals.
What is a Regular Savings Plan?
A regular savings plan is an investment plan that can give you the flexibility and scope to save towards your financial goals, while also giving your savings the opportunity of a boost via investment performance. It is a regular premium investment solution for your savings. This plan allows you to invest your savings on a monthly basis, into a fund that is appropriate to your attitude to risk. This type of plan is best suited for medium to long term goals such as saving for a deposit for a home, funding for your children’s third level education and savings for the future. A sensible and appropriate Savings Plan can form an integral part of your overall financial planning, around future goals, expenses or projects. There are certain criteria necessary to put together a coherent savings plan, that suits you. We strive to put together a tailored plan which is both appropriate to your financial circumstances and goals. These elements will be discussed below: 1. What your Goal is 2. Suitable Contribution Level 3. Time Horizon 4. Attitude to Risk
Goal & Contribution Levels
The first element of a savings plan to crystallise is what is an appropriate amount for you to contribute each month. The minimum premium for a regular saver is 100 per month, you also have the option of adding lump sums to this plan throughout the term. You can also increase the contribution amount to the plan at any time. 100 may be feasible starting off but down the line 300 may become a feasible figure and this can be accommodated. The most important step is opening the savings plan. You also have the flexibility to reduce your monthly contribution if you wish. Your monthly contribution is collected by direct debit each month. This creates a default system and allows you the opportunity to follow Warren Buffet’s advice – “Do not save what is left after spending, but spend what is left after saving”. Saving is a habit and with a Savings plan you have a detailed strategy for your savings. A well assembled savings plan can be an important piece of your overall financial planning portfolio.
The second aspect, which is integral to the chosen contribution level is what is the goal of this plan? What do you hope to use these savings for? Your goal and chosen contribution level must match up. The relationship between chosen contribution level and ultimate goal must be achievable and sustainable. This is where financial modelling comes in to determine the fund needed for such a goal and the contribution level and timeline needed to have a strong probability of reaching that goal. Financial planning and tailoring of the savings plan to your particular needs and objectives is of paramount importance. Engagement with your financial goal and contribution necessary is the crucial first step to setting out on the Savings & Investment Journey. Tailored financial planning and guidance is needed to make this plan as effective as possible.
The Investment Journey – Time, Fund Choice & Attitude to Risk
Investing is a journey, especially when you’re investing a monthly amount towards a long or medium term goal. We have covered the relationship between contribution level and the attainment of the core goal, the next important aspect is fund choice. The fund or funds chosen for your savings plan like your contribution level must be suitable for you and your attitude to risk. If you’re looking to save and accumulate a fund towards quite an ambitious goal but want to take on zero risk, this simply will not work. When you’re contributing on a monthly basis, the goal is to accumulate, therefore it makes sense to take on some higher risk and higher yielding funds within your risk rating. These funds may be appropriate given your risk questionnaire results. The key aspect before choosing a risk level or particular fund or set of funds is establishing the time horizon of this investment. 5 – 7 years is the recommended minimum. Depending on your goal you may have a built in time horizon. The example below illustrates this:
- Married couple aged 35 with 2 children – 6 & 4
- They would like to put a Savings plan in place to fund for cost of Third Level Education for their 2 children
- If they start a Savings Plan now, they have a minimum 12 year time horizon until their eldest child will be considering third level education
- In 2019 Zurich Life Published the annual cost of third level education if a child stays in Student Accommodation at – 8,830 annually with an average course length of 3 – 4 years. Living at home brings this cost down to 4,611
- This is a considerable outlay, and putting a savings plan in place for this is future expense can be hugely beneficial for when the time comes.
- A well thought out and funded savings plan in this scenario could build a fund that could afford to cover these costs and prevent possible financial pressure in the future.
- Projections would be very positive for a monthly contribution invested in medium to high risk fund for a strong 12 year time horizon.
Using the Milestone Approach
Throughout the Savings Plan and Investment journey, you will reach certain milestone amounts. While you may have taken a more aggressive fund approach on your monthly contributions when your fund reaches a certain level you may want to reduce risk or de-risk totally. This may involve moving the accumulated sum for example – 30,000 to a more secure lower risk fund, so it is not exposed to undue risk. However you can still have your regular contributions going into the higher risk/yield funds going forward. This blends accumulation with capital preservation. Your lump sum will still be invested but in a more risk managed way, you will have access to a range of funds, suitable for different periods and aspects of your plan. You also have the option of adding a lump sum to your Savings Plan at any time.
A concluding note
If financially feasible, a plan around your savings is never a bad idea. If you want to put a more holistic plan in place to grow your savings towards a goal a regular savings plan can be an excellent vehicle for this. A tailored plan is crucial to give you the best chance of attaining your savings goal is a realistic and sustainable way.