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How to build wealth in Ireland: Save and invest in your 20s and 30s
When Teresa Bruen and Brian Redmond were aged 24 and 25 respectively, they bought their first home – an old house in need of a lot of love outside Gorey, Co Wexford – for €195,000.
At the time, they had a combined income of €55,000, with Redmond working as a teacher and Bruen an apprentice financial adviser. They lived with Redmond's mother at her home in Wicklow and paid rent, and on top of this, he commuted daily to his teaching job in Castleknock, Dublin.
But with no family help towards the house purchase, how did they do it?
'We just saved anything we could from the start of 2019, and we didn't have help from anyone,' says Bruen. 'I know people hate when we tell them don't go out for a coffee or go away for a holiday if you want to save, but that's what we did. We had a hard 12 months or so of saving the guts of €2,000 a month, and our wages weren't great so with the exception of whatever we needed to eat, we saved everything. And that's how we got there. In June 2020 we bought our first home.'
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Bruen, now aged 30, and a financial planning consultant, and Redmond, 31, have a two-year-old and live in a larger home in Gorey having sold their first house in May for €316,000, a profit of €121,000. They have since bought again in the same area for €500,000.
'At the time we had friends telling us to live our lives a bit more, but we had our goals and that was to get a house and then enjoy a holiday. Now these friends are at the stage we were at back in 2019 and saving to buy something that might not be achieved until they are 40.'
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Are the couple, who have now shifted their financial energies towards pension pots, a good example of an age group primed for a lifetime of secure financial planning, or is there hope for people only beginning to address such matters in their 40s and even 50s? Is there a right age and time for financial planning?
While research shows young people are much better at saving these days – the Growing Up In Ireland study of 25-year-olds, published in March, found two-thirds save regularly – this money is not ending up in investments or pensions.
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The Life Insurance Association (LIA), which specialises in education and development of financial advice and planning professionals, shared research that same month that found that 42 per cent of young adults – ages 18-34 – do not have a pension.
This, according to some financial experts, is a wasted opportunity, particularly for thirtysomethings who by properly mapping out and planning their financial futures, could make life very comfortable in the decades that follow.
'The most valuable asset you have in your 30s isn't your job title, your property or your savings account, but time. When you invest early, time will do the heavy lifting,' says Robert Whelan of Rockwell Financial, a Dublin-based financial management firm.
'This is the essence of compounding: small amounts, invested consistently and allowed to grow, can become something meaningful.'
To drive home his point, Whelan presents two examples – a person who starts saving in their 30s for 10 years, stops and never contributes again, compared with another who starts saving in their 40s for 20 years. Both save €3,000 a year and achieve a 7 per cent return on their investments, but there is one clear winner.
'By the age of 60, the early saver ends up with €151,000, while the 20-year saver from the age of 40, ends up with €122,000,' he says. 'Let that sink in: the early saver ends up with €29,000 more, even though they contributed €30,000 less overall. The difference was time, because those early contributions had two extra decades to grow.'
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Time is something Whelan values given his own brush with missed savings, pension contributions and compounding.
'In 2008, when the financial crisis hit, I was 31, and like so many others, I took a significant salary cut just to stay employed,' he says. 'A few years later, at 35, I was made redundant, so I started a business at yet another pay cut. This meant, for nearly a decade, I didn't go back to my 2008 salary level because I was focused on survival.
'It's why I can relate to those in their 30s now who are worried about the effect of missing out on getting on the property ladder, as I know the real cost. It isn't just the money you didn't earn – it's the wealth you don't build.
'I meet a lot of clients between the ages of late 40s and early 50s, and the difference between those who managed to avoid the worst of the recession and their peers is significant. These were workers in tech or pharma, or sectors which weren't really affected by the downturn, and got wage rises when people were getting pay cuts, or bonuses when others were just happy to have a job. So if you have the opportunity to build on your wealth, you should do it.'
But where you save, what access you need to funds and what returns you might get on those savings are just as important, says David Funcheon, a financial planner at Ask Acorn, a personal and business financial company in Galway.
'If somebody needs access to cash in the short term, which we define as three to five years, it should be in an on-demand deposit account, but if it's going to be longer, they should be saving into an account or a fund that's going to yield them a return equal to the risk you're willing to take to get that return,' he says.
'We have a serious amount of money being invested in traditional banks and current accounts and deposit accounts that are returning little to nothing.
'A lot of these accounts are returning 1-1.5 per cent, with inflation around 2 per cent, so the buying power is being significantly affected. If people can save in a facility – whether an equity-based fund or a managed fund through a life company set-up – then you can expect to get a return of 4.5-5 per cent over the medium to long term because the effect of inflation is negated by the rate of return.
'Saving in equity-based funds over traditional banks also has the benefit of gross return or 'gross roll-up', where the tax is applied on these funds every eight years, whereas traditional bank accounts are taxed on an annual basis.
'Someone in their mid-to-late 20s with the goal or expectation that they might be able to save €20,000 or €30,000 over a 10-year period could actually benefit from the compound gross roll-up year in, year out for eight years and then be taxed on that rather than on an annual basis.'
You need to get your basics right – get a roof over your head, keep your debts low, and then move on to your investing
But all is not lost for people in their 40s and 50s who want to enhance their pension funds now because some additional disposable income is finally available to them.
'I would be looking at how they are fulfilling their requirements in relation to the amount that they can save equal to the threshold of €115,000 based on their age,' says Funcheon.
'If someone in their 40s can save 20 or 25 per cent of their income – most people are probably saving on through pension return of about 6-8 per cent – there is huge scope to make up that difference through additional voluntary contributions [AVCs].
'The benefit from that is the tax relief, because if they're earning over €44,000 a year, they're getting a 40 per cent return on it. So there's a huge advantage to doing it because it's then supplementing the retirement income.'
Bruen's advice for people her own age and younger is to start saving immediately and be realistic about what you want in the short term before planning for the longer term.
'I think a lot of young people get caught up on TikTok and Instagram and come out with all these ideas around how to make money fast and invest in certain things like Bitcoin and stocks on Revolut, and these are not the places to be saving your money,' she says.
'If your goal is a house and you want to do that in the next five years, then you need to be looking at banks, at deposit accounts that offer cashbacks, then that's a good place to get started. You need to get your basics right – get a roof over your head, keep your debts low, and then move on to your investing.'
