Your Money: Splash the cash

It's time to start spending that rainy day fund, according to the Government. But instead of throwing money away, here's some options that could strengthen your financial position, says John Cradden

After months and months of urging us to save, save, save, the Government apparently wants us to spend, spend, spend.

Justice Minister Dermot Ahern said the level of savings in the economy had grown from 4pc to 12pc, and people must now be persuaded to start spending.

"People are saving their money, so what we really need to do, as a nation, is try and get those people who are saving their money to spend their money in the economy," he said.

The minister was speaking at a press conference last month following a day-long Cabinet meeting at Farmleigh House in Dublin to discuss how to achieve €3bn in spending cuts.

Such comments may go down like a lead balloon among cash-strapped consumers, many of whom remain fearful of losing their jobs, even as consumer confidence indices begin to show some signs of life.

A recent poll by research firm Red C shows that 70pc of consumers do not envisage increasing their spend over the next 12 months on things like groceries, entertainment, consumer goods and services, and holidays.

"Most households will not start spending again until they are confident the economy has recovered," says Niall McHenry, managing director of consumer website SaveAFewBob.ie.

"Right now, consumers have to deal with increased mortgage repayments on properties that are still falling in value. I think under current circumstances, it would be more prudent for consumers to hang on to some of their savings."

Although Irish households have been saving furiously, the latest statistics show a 0.77pc drop in overall household deposits for May.

Simon Moynihan, of consumer comparison website Bonkers.ie, says it's too early to say whether this slight fall off represents the start of a trend.

"My feeling is that it's seasonal," he says. "People are getting ready for summer, treating themselves and paying for holidays.

So if you have surplus cash or a lump sum burning a hole in your pocket, but would rather use it to strengthen your financial position than spend it, what, then are the most obvious spending options that offer good value?

Pay off mortgage debt?

"In many cases, you are paying more for debt than you are earning on interest, and bear in mind that debt is paid for with after-tax money and that interest has DIRT tax," says Karl Deeter of Irish Mortgage Brokers.

"So, when you look at it that way, it makes sense to use extra money to either rid yourself of debt, such as paying off your mortgage. Then, save or invest," he added.

Indeed, many people on standard variable rates may be choosing to pay off more of the mortgage to better protect themselves against the prospect of higher interest rates.

On the flipside of that though, some say that with mortgage rates -- especially trackers -- as low as they are, putting surplus cash into a good deposit account could be a better home for it.

This is because it means they can get at the money in an emergency.

"Using it to pay down a mortgage means it's gone and it's extremely unlikely that banks would allow someone who's lost their job to release equity by remortgaging," said Mr Moynihan.

Start a pension or increase your contributions?

This is worth considering, in light of the Government's plans to reform the pension system by 2014.

The main change expected is that there will be a single tax relief rate of 33pc on pension contributions, instead of either 20pc or 41pc.

This means that anyone in the higher 41pc tax bracket should maximise their pension contributions for the next four years.

For those closer to retirement, and looking to maximise the value of their pensions or cover any shortfalls, AVCs (Additional Voluntary Contributions) allow you to build up an additional fund, within Revenue limits.

"If you get a match from your company and you can afford to, do the max," said Mr Moynihan.

Extend your home or home improvements?

If you are in negative equity, it may make some sense to start investing in extending your home, or undertaking some form of home-improvement project.

For example, extending the attic, installing central heating, replacing your windows, or improving the kitchen or bathroom can add value to your home.

Even installing energy-efficiency projects, like some better insulation or even solar panels, can bump up your asking price.

Get on the property ladder or trade up?

"For those who haven't bought a home yet, or who may be considering trading up I think now is a great time to buy property," said Niall McHenry.

"Those who have cash, or if they qualify for finance, are in a really strong negotiating position.

Many others are still wary of taking a fresh plunge, or another dip into the property market, however, as confidence has not properly returned.

"Values are still falling and I think they are going to keep falling," says Mr Moynihan.

"For most people, if they can't borrow, they can't buy houses," he added.

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