Question of Money – Investment

“I am starting my first graduate job after four years of full-time education. I currently keep my savings in a credit union account. Where is the best place for me to start investing my money to earn a better return? I have considered investing in exchange-traded funds (ETF), but they do not seem to be very tax efficient. Should I consider other options, such as investment funds or property?”

Anon, Co Leitrim

Well done on building up a savings fund while in full-time education. This would indicate that you have a good handle on your cash flow and are responsible with money. Presumably you are in your early twenties — now is the time to put a long-term financial plan in place.

There are some basics to financial planning. First, protect your lifestyle. As you enter full-time employment, take out income protection or critical illness cover. Organising this becomes more expensive as you get older, so it would be wise to address it now.

Second, retirement may not be your priority as you begin your graduate career, but nobody ever said on retiring that they started a pension too early. The most powerful thing in finance is compounding, and by getting a pension plan in place, invested in well-diversified global equities, you will be building a fund that will maintain your lifestyle when you decide to stop working.

In your twenties you can invest up to 15% of your income into a pension to get full tax relief. How close to this can you get?

Third, before taking investment advice, it is important to know your investment goal. If you need to access your savings within the next five years, the money should remain in deposit-like products. The offering with the credit union is fine in this regard.

If your investment has no clear goal, and is likely to be for a longer period, you can look at wider options. You have referenced tax efficiency. Dirt is applicable on your credit union savings at a rate of 33%. ETFs, which you have explored, and investment funds through the life companies, are subject to exit tax of 41% on the growth.

The strategy that you can pursue through a particular ETF, such as tracking an equity index, can be matched by indexed funds offered by the life companies. As a broad rule, ETFs will be lower cost but possibly with wider requirements from an administration and taxation perspective. Investment funds offered by the life companies can provide similar investment strategies at a slightly higher price but with more administration and taxation convenience.

Either way, taking a long-term view and investing in a well-diversified global equity portfolio has historically given the best returns on investment. However, the cost of investment growth is volatility, so it’s important to be aware of the increase in volatility with such an investment compared with your current profile. Take a disciplined long-term view and don’t react to market changes.

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