Why Invest?
Your first home, university for your children or grandchildren, a comfortable retirement. These are just some of the reasons why you might choose to invest. Even if your list is different, to help afford these major expenses you will likely work with a financial adviser and following these key steps:
1. Identify your goal(s) and time horizon.
2. Set aside a portion of your income.
3. Put your money to work in the financial markets.
Investing and Saving
When you “save” in a bank savings account, An Post savings account or the credit union, you can expect to receive a rate of return that is tied to current short-term interest rates.
Investing is different from saving because it involves the risk that the value of your original investment could fluctuate, and no return is guaranteed. Yet, it’s hard to imagine that you can achieve your long-term goals without investing. History shows that investing in the stock and bond markets provides greater returns than most investors can earn through guaranteed savings. And, the risks of investing diminish over time, while the hidden risk of saving increases over time, because of taxes and inflation.
Staying ahead of taxes and inflation
When you are aiming for a long-term financial goal, taxes and inflation can be your two worst enemies. The interest you earn from any savings is subject to a tax called Deposit Interest Retention Tax (DIRT). Since April 2009, DIRT is charged at 25% (was 23%). The tax is deducted by the bank or other deposit-taker before the interest is paid to you. Each year, inflation reduces the purchasing power of each euro at an average annual rate of approximately 2.6%*. (* Annualised Irish inflation for the 15 years ending 31/12/09 was 2.6%).
When you think about these hurdles, it’s easy to see the need for a healthy return. If you’re really going to come out ahead of taxes and inflation, you need to think about investing in stock and bond markets. Over the long term, and despite the ups and downs of both markets, they have outperformed “savings” by a wide margin.
You don’t have to be an expert to be a successful investor. But it’s easier to invest with confidence if you get the expert advice of a financial adviser.
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