Splitting income between saving, investments and other opportunities

k2788

I'm looking for some advice on what way I should be splitting my (fairly small) monthly income into a range of different areas

At the moment I can probably only afford about €200-€300 a month to put away and this will hopefully increase over time as I have only been working full time about a year.

Up until now, the majority of any excess money I've had I've put into small amounts of shares in BOI, Bank of america, ryanair etc. through a cheap online broker. Mainly for practice and to learn about how the stock investments works without breaking the bank.

Overall I have around €1500 between them all and if I withdrew everything today, I'd be up around €150 euro which to me seems a nice return!

Im looking for other ideas as to how I (or anyone) can start spreading out income into things other than shares ? Lots of articles talk about how diverse portfolios fare better in the long run.

Obviously how averse a person is to 'risk' should be a factor but since the amounts I'm investing are low and mainly for learning purposes, 'risk' is not really a major factor for me.

At the moment I'm considering
- €200 into stocks/shares
- €50 into the credit union or a type of savings account
- keep the rest in the current account

Is there better tactics I can investigate?

Experiences, discussion and ideas are welcome!

Diziet

You need a rain day fund for a start. Enough money for emergencies in case job disappears, washing machine breaks, that sort of thing. Are you saving for something specific? Once you have your cash flow sorted, look at what you can put away for the longer term.

Shares are good to invest in. Make sure you spread over a range of sectors, and it is generally better to buy and hold rather than trade often. Reinvest dividends rather than take them out, it's amazing how your portfolio grows if you do that.

Merowig

I agree with Diziet - first you should hold enough liquid assets for ~6 months of living expenses.

Then check if your employer would top-up pension contributions. If so that is free money already
You should consider in any case to get a pension - even if you put in it only small amounts at the beginning- you'll get tax back - so this is again an instant win and it growths there over time nicely.
Unfortunately pension is one of the few remaining tax effiecent investments.
Should you start to pay 40% tax and have maximised pension contributions the next best tax efficient investment possibility is the "Employment and Investment Incentive Scheme".

Capital Gains Tax is here ridiculously high

bmwguy

Pension before stocks and shares. Especially if you are working and paying tax and employer is contributing.

Put it this way. My employer matches my contribution capped at a maximum of 100 per month.

I get tax relief on my 100 contribution so net cost is 60 to me. I get 200 in for a cost of 60. I know there are charges etc and some of it will be taxable in the future but that's some return to be honest.

Even if no employer contribution it's a 67% return, I.e. I pay 60 govt pays 40 in effect.

After that is sorted you have the choice of a managed fund or individual stocks and shares. I go the managed fund route and it does very well it's the same strategy as my pension. Looking at cashing it 5-10 years down the line.

dennyk

As others have suggested, you should prioritize an emergency fund first. I like to have at least six months of expenses (not salary) at a minimum, but some folks are happy enough with three or four.

Second priority would be a tax-advantaged pension plan, if your employer offers one, or a PRSA or similar if not. Definitely contribute at least the amount you need to avail of your employer's maximum matching contributions; if you don't do that, you're literally throwing away money. If you can, try to contribute up to the maximum tax-advantaged amount (it varies by age; see http://www.citizensinformation.ie/en/money_and_tax/personal_finance/pensions/occupational_pensions.html for some basic info).

When you've maxed out your occupational pension or PRSA tax-advantaged contributions, then you may want to consider some taxable investments.

For investments, both in your pension fund and in a taxable account, it's best to aim for a balanced portfolio. Buying shares of individual companies is not generally the best option if you're looking for a stable long-term investment; it's safer to buy shares of mutual funds which are made up of many different equities and sometimes other investment vehicles such as bonds. These will more closely follow the market as a whole and don't carry the high risk of a single company losing significant value.

Index funds are usually well-recommended. These are funds that are automatically indexed to a specific market segment or an entire market, rather than being actively managed. Their advantage is that the management fee is usually much lower than a similar managed fund, and over time they tend to perform as well or better than equivalent actively managed funds. Management fees (expense ratios) are a key element of your investment strategy; if you have an index fund with a 0.20% expense ratio and a managed fund with a 1.20% expense ratio, if both funds perform about the same (say a 4% annual return), your net annual return on the managed fund would be ~2.8%, compared to ~3.8% on the index fund. Over a period of decades as with a retirement pension, that difference in expense ratios adds up to a whole lot of money.