Interest rates are coming down.
This is really positive news for those with loans directly linked to ECB interest rates. Like those with tracker mortgages.
But for those with cash, the news is not so positive.
As banks announce interest rate reductions on mortgages, they are also cutting deposit rates. Little surprise there!
What is surprising is the general reaction. Its as if those with cash are somehow entitled to high deposit yields on their money.
When and why banks pay
Banks here in Ireland or anywhere else in the world do not pay deposit yields unless they have to. The reason is simple. If they don’t require additional cash, they are unlikely to pay deposit yields to attract it. Besides, excess cash on deposit would simple sit unused due to the current home buying market. And because of this, they are unlikely, anytime soon to reverse course.
How to grow money
The only long-term means of actually growing money is by investing. This involves risk. And this is where most people bow out. Because of a general lack of investment knowledge, most prefer safety. This can then lead to a degree of financial frustration, especially when investment markets are good. People look at those growing stock market in envy and want a slice of that action. But they are unwilling to pay the price; by taking a risk. So they take their investment frustrations out on the banks and the low-yielding deposit accounts.
2025 markets
Earlier this year, I placed some funds into some European-based ETFs. Since then, and despite the market turmoil caused by US tariffs, those investments are up by about 4%. This is a multiple of what banks will pay over the course of an entire year on many deposit accounts.
Of course, there is no certainty what the rest of the year will bring. But investments should be long-term in nature. They should not be used for chasing short-term yields. At a minimum, the investment window should be 3 years+ in duration.
Knowledge is key
When it comes to any form of investing, knowledge is key.
First, the principle of diversification is central to any investing decision.
Second, time is critical. The more diversified an investment, the greater opportunity it will have to grow over time.
Third, taxation plays a critical role. Unfortunately, here in Ireland, the taxes applied to investment returns in general is draconian. In a recent seminar, I delivered to some US-based attendees. They struggled to comprehend the extraordinary level of taxation that applies to Exchange Traded Funds (E.T.F.) in Ireland. For clarity, it is one of the most draconian in the world. Indian, Canadian, US and Chinese nationals living here are shocked by the high tax on investment yields. They routinely express their horror.
Taxes aside, investing remains one of the few means of growing money. It can generate a yield that exceeds current inflation over time. Pensions are the other.
But to make investing palatable in Ireland, there needs to be urgent reform of how investment returns are taxed. This must include higher tax free allowances (at the moment €1,270). Lower tax on gains (at the moment, it is 41%). And the deemed disposal should be abolished. This would negate the unfair situation of losses not carrying forward.
Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz
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