So many low risk and cautious investors sit with bated breath and ponder as to when these times of historically low savings rates will end. BES in Portugal has served us all with a reminder of the fragility of the banking system that even if rates did rise, would you trust the institution where you place your hard-earned cash?
In order to make your life a financial success, we all must carefully balance our personal finances and make that cash work that little bit harder, whilst at the same time remain available for those emergency situations.
If you have failed to rein in your spending or have even over-invested in something illiquid like property, life-changing events can quite literally change a comfortable life overnight into a very tough financial battle. In this situation, an emergency cash reserve becomes your saviour.
Good financial sense would plan to keep such an amount available. But you must expect to achieve little or no return and be disciplined to only access it in such extreme conditions.
With cash on deposit, there is no doubt that some timely income and expenditure analysis allows you to plug any gaps where your money is being used inefficiently. The results usually produce surplus liquidity to either save, which is a necessity for those with young families, or go out to have fun and blow your budget once in a while, whatever age you are at.
How much should your emergency reserve be and can you afford it?
This depends on your age, your income levels, other assets or equity and debt. A general rule of thumb is either safekeeping six to 12 months’ of salary if you are working or, if retired, usually 10%-20% of the value of your assets. It is worth noting that if you decide to become resident in Portugal, you must demonstrate that you have sufficient cash reserves to not become a burden on the state.
Should you have the opportunity to save either on a regular basis or have sufficient amount of capital surplus for emergency cash requirements, with little investment experience or risk, where do you go to preserve the capital and obtain a return that makes the banks’ offerings pale in comparison?
Certainly there are opportunities for investments in property and you can deal with a professional property adviser or agent. The property market is a regulated industry in Portugal. In addition, rental income, when dealt with correctly, may allow you to achieve tax breaks when dealing with short-term holiday lets, which can reach an effective rate of an income tax rate of less than 4%.
Across financial markets, a single lump sum investment or even regular savings contributions placed into compliant and tax-efficient life or pension-based savings vehicles, available here in Portugal but mostly in regulated offshore centres across Europe, are viable alternatives to investing your cash. Financial markets, like property, provide real rates of return that cash simply cannot afford these days, if you are prepared to take the excess risk.
Independent and international financial advisers can manage more open architecture solutions outside of Portugal, but make sure that, whatever you do, you must clearly understand their terms and conditions, the costs, accessibility, and that they meet your objectives and desires, with all forms of taxation sufficiently covered.
Today, an international perspective presents the better long-term path where financial planning is concerned and the cost for good advice can be priceless where the sovereignty of your cash is concerned.
So, when will interest rates go back up again?
The current historic lows in interest rates are unlikely to hold indefinitely. Rates were pushed to these levels to cope with the aftermath of the financial crisis, which was a severe event and still with much winding up to be done.
Even as economic growth settles in and more consistent fractions of light appear on the horizon, there seems little or no urgency to raise interest rates, either in the UK or the US. Across Europe, for now, it would appear quite a way to go.
This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.
By Raoul Ruiz Martinez
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Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333
