The Saver's Greatest Enemies!

If you don't learn to cope with these ten challenges, then you can never become a successful saver.

These days, it seems that the noble art of saving has gone completely out of fashion, with people preferring to live for today by spending tomorrow's money now.

Indeed, the official figures confirm this view. In 1995, we Brits saved more than a tenth of our take-home pay: 10.2%, to be precise. A decade later, this "savings ratio" had more than halved to 4.8%, although it has started to creep up this year.

So, what's stopping us from saving with the same enthusiasm that we had ten years ago? The simple answer is that we're spending more of our income, which means that we have less left over to save. For some people, this squeeze is due to higher household bills, but others are simply trying to "keep up with the Joneses". (I'd like to meet these legendary Joneses and give them a piece of my mind, I can tell you!)

In any case, if you're going to succeed as a saver, you need to watch out for the bumps on the road ahead, as no strategy ever went absolutely according to plan. Here are ten pitfalls to watch out for (in alphabetical order):

1.A low or reduced income

Of course, it's much harder to save when you're struggling to make ends meet on a modest income. To boost your chances of success, you need to increase your income and decrease your expenditure. If you'd like to earn more (and who wouldn't?), try the following articles for size: Ten Ways To Boost Your Salary, Get A Bumper Pay Rise This Year and Ten Top Tips To Win A Pay Rise.

2.Debts

Banks pay lower rates to savers than they charge to borrowers. In other words, when you borrow money, you almost always pay a higher rate of interest than your savings earn. Thus, it doesn't make sense to earn, say, 3% a year after tax on savings of £2,000 while at the same time paying, say, 16% a year on £2,000 of credit-card debt. In most cases, the best thing to do is to use your savings to clear your debts.

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3.High house prices

As I showed here, there is a powerful link between the savings ratio and house prices. Quite simply, when house prices rise, the savings ratio falls, and when the savings ratio rises, house-price growth slows or prices fall. Thus, the "wealth effect" created by the latest housing boom has curbed our urge to save. Indeed, although house prices are at an all-time high on many measures, saving will again become fashionable when the housing boom ends and house prices go into reverse.

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4.Inertia (a polite word for laziness!)

With savings accounts, you can't simply "fire and forget". In other words, you can't just find a great account, slap your dosh into it, and then relax. That's because banks and building societies use customer inertia as a key part of their marketing strategy. Using the "bait and switch" technique, they launch new savings accounts, quietly withdraw and replace them, then start cutting interest rates behind our backs. Hence, it pays to keep an eye on your savings rate by checking it every month or so.

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5.Inflation (what is inflation?)

To savers, inflation is the "silent assassin", quietly shrinking the returns which our money earns. Inflation is the tendency for the price of goods and services to rise over time, which makes today's cash worth less in the future. The official measure of inflation used by the Bank of England and other bodies is the Consumer Prices Index (CPI), which stood at 2.5% in June. In other words, the price of the goods and services in the CPI basket was 2.5% higher in June 2006 than it was in June 2005.

As the CPI doesn't take housing costs into account, I prefer to check the Retail Prices Index (RPI), which currently stands at 3.3%. In other words, if your savings didn't earn at least 3.3% after tax over the past year, then their buying power has reduced and, in effect, their "real value" (taking inflation into account) has fallen. Eek!

6.Low interest rates

Although homeowners struggling with hefty mortgage repayments wouldn't agree with me, this is a great time to be a borrower, rather than a saver, because prevailing interest rates are very low in historical terms. At present, the Bank of England's base rate (the foundation stone for other banks' interest rates) is a mere 4.5% a year, which is lower than it was at any point between 27 February 1964 and 4 October 2001.

On the other hand, low interest rates are bad news for savers, because they enjoy lower returns on their nest eggs. Nevertheless, it's important to remember that, for savers, "real" rates are what count -- the interest rates they earn after taking inflation into account. Currently, it's possible to earn over 4% after basic-rate tax in a savings account (and even more in a tax-free account), so at least real interest rates are positive at the moment. This hasn't always been the case in the past -- often, inflation ate away at personal savings faster than interest rates increased them. Ouch!

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7.Not saving regularly

It's so much easier to be a spender than a saver. To spend freely, all you need is an urge to splurge, but to be a staunch saver, you need discipline and willpower. One way to bolster your willpower is to accept the discipline of regular saving -- putting aside a set sum every month. By doing this, you make saving automatic and therefore easier, and you'll also gain access to the very highest rates of interest. So, if you fancy earning between 7% and 10% a year before tax on your emergency fund or nest egg, get the regular-savings habit!

8.Tax

When you work, save, invest, spend money or even die, you can't escape the taxman's clutches -- there's a tax for every occasion! With taxable savings accounts, basic-rate taxpayers lose a fifth (20%) of their before-tax savings interest to the taxman. For higher-rate taxpayers, the taxman's take is two-fifths (40%).

Thus, to earn a positive return after RPI inflation of 3.3%, a basic rate taxpayer's savings need to earn almost 4.13% a year before tax. For higher-rate taxpayers, this figure shoots up to 5.5%, which is a tall order. However, by saving up to £3,000 per tax year in a tax-free cash mini-ISA, taxpayers can earn tax-free interest of 5%+ a year. Hence, a cash mini-ISA is a vital weapon in the saver's battle against the taxman!

9.Spending and bills

Spending and saving are sworn enemies, because in order to save for tomorrow, you have to spend less today. Indeed, if you spend more than you earn, then you have no chance of saving, because you're not living below your means. Therefore, if you're going to become a superior saver, you must first get to grips with your spending habits. Learning to budget would be a good start!

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10.Time

Paradoxically, time is both the friend and the enemy of savers. As time goes by, savers earn interest on their savings, and this interest earns yet more interest, and so on. This delightful effect is known as compound interest. However, if you're planning to save over long periods, then you'd be better off investing in shares, rather than saving in cash.

Indeed, the longer your timescale, the more likely it is that the returns from shares will beat the interest earned by cash. Hence, if you're looking at saving for ten years or more, then ditch deposit accounts and switch to shares. This cheap, simple investment is ideal for beginners and experienced investors alike.

Here's wishing you fewer unexpected bills and more money for saving!

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