The Regular Saver Versus Lump Sum Decision
Aoife has €30,000 sitting in a current account earning nothing. She also saves €500 per month from salary. She is considering two options: (a) put the full €30,000 into a 2-year fixed-term deposit paying 2.5% AER, or (b) put it into a regular saver account paying 4.0% AER on monthly contributions of up to €500, with the €30,000 staying in the current account and being drip-fed at €500/month. She has no emergency fund. She is 34, in stable employment, and has no dependants. She tells you the 4.0% 'sounds obviously better than 2.5%'.
1. Compare the two options quantitatively and explain why the headline rate is misleading.
Read the worked answer
Option (a) - lump sum at 2.5%: €30,000 × 2.5% ≈ €750 in year 1, and roughly €750 in year 2 (compounding gives about €1,519 over two years). All €30,000 is earning from day one.
Option (b) - regular saver at 4.0%: The 4.0% applies only to money actually in the regular saver each month. If she drip-feeds €500/month from her existing €30,000, the average balance in the regular saver over the period is low. Over 24 months she contributes €12,000; the average balance is roughly half of that, so interest is roughly €12,000 × 4.0% × (average balance factor ≈ 0.5) ≈ €240 over the period - far less than option (a).
The key point: the €30,000 left in the current account earns 0% while waiting to be drip-fed. The headline 4.0% is applied to a small, growing balance, not to €30,000. The effective return on her total €30,000 is much lower than 2.5%.
Also note: her ongoing €500/month salary saving is separate - she can put that into the regular saver at 4.0% regardless of what she does with the €30,000. The two decisions should be separated.
2. Given she has no emergency fund, recommend an allocation and justify it.
Read the worked answer
Step 1 - build the emergency fund first. With no dependants and stable employment, a buffer of 3–6 months of essential outgoings is the priority. Carve out, say, €9,000–€12,000 into an instant-access or short-notice account. This money is for access, not return - it should not be locked in a 2-year fixed term.
Step 2 - the remainder into the fixed deposit. The balance (roughly €18,000–€21,000) can go into the 2-year fixed deposit at 2.5% AER, since she does not need it and the rate is locked.
Step 3 - route her salary saving into the regular saver. Her ongoing €500/month should go into the 4.0% regular saver, because that is genuinely new money and the high rate applies to it. This captures the best of both.
Justification: the emergency fund is non-negotiable given she has none; locking all €30,000 for 2 years would force her to break the deposit (often with a penalty) at the first unexpected cost. Splitting separates the access need from the return need. The regular saver is used for what it is designed for - regular new saving - rather than as a home for a lump sum.