The seven worst savings mistakes ever!

If you've got a savings account, or you're thinking of applying for a new one, watch out for these top blunders!

The past couple of years haven’t been the most enjoyable for savers. With most of us being forced to tighten our belts, saving has become increasingly challenging. And even if we have managed to save, we’ve been lumbered with plummeting interest rates.

So to make sure you’re getting the most out of your savings, here are seven of the worst savings mistakes to avoid at all costs!

Ignoring the interest rate

Unfortunately for savers, interest rates on savings accounts change all the time - particularly on variable rate accounts. And that means that although you may think you know what interest you’re earning on your savings, this might not actually be the case.

Of course, trying to keep track of whether your interest rate has changed can prove a tad tricky at times. So if you’re currently unsure how much interest your savings are earning, check your bank’s website.

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Admittedly, interest rates on savings accounts aren’t too inspiring right now. But that doesn’t mean you have to put up with a pathetic rate. If you’re not happy with the return you’re getting, shop around using our savings comparison centre, and find a better account!

One of the market-leading easy access savings accounts is the Halifax Web Saver Extra. This offers an interest rate of 2.80%, but an even better 3% if you’re a Halifax current account customer.

Alternatively, the West Bromwich Building Society Direct Bonus Account 1 offers an interest rate of 2.92%, which includes a bonus of 1% until 31 January 2011.

Forgetting about the bonus rate

This brings me neatly onto bonus rates. Bonus rates have become a common feature of savings accounts over the past couple of years. And while this isn’t necessarily a bad thing - after all, bonuses provide some guarantee that your interest rate won’t drop below a certain level - bonus rates are only temporary.

This means that as soon as the bonus rate expires, the interest you’re earning on your savings may no longer be very competitive. As a result, it’s time to shop around for a better account.

Fixing for too long

Because savings rates can change so often, you might prefer to consider a fixed rate bond. That’s because the interest rate on your savings won’t change until the end of the bond term. But while this can be a good idea for the short-term, make sure you don’t fix for too long.

It’s pretty likely that interest rates will start to rise in the not-too-distant future. As a result, if you’ve locked into a four or five year fixed rate bond, you may find that after a year or so, the rate on your account is no longer competitive. And because you can’t withdraw your funds without paying a penalty, you’ll be pretty much stuck where you are.

Forgetting about withdrawal restrictions

To make things even more unfair for savers, some instant access accounts restrict how often you can withdraw money, and how much you can withdraw.

Unfortunately, the Halifax Web Saver Extra is one such account as it only permits you to have one penalty-free withdrawal. If you make more withdrawals than this, you’ll lose the equivalent of 30 days’ interest on the amount you’ve withdrawn.

The Sainsbury’s Finance Easy Saver, which offers an interest rate of 2.50%, is slightly more generous as it allows you to make up to five withdrawals in a year. However, if you make more than that, the interest rate will drop to 0.5%.

So make sure you read the terms and conditions of your account carefully to ensure you don’t get caught out.

Forgetting about tax-free savings

One of the problems with saving is that the taxman has a tendency to get his grubby mitts on a fairly big chunk of your funds. Fortunately, there are ways to avoid this and save tax-free. So make sure you don’t miss out!

An ISA is a great way to take advantage of tax-free savings. And the great news is that as of Tuesday, 6 April, the tax allowance went up to £10,200!

You can choose to invest the entire amount in a stocks and shares ISA, or, if you prefer, you can put up to £5,100 in a cash ISA and the rest in stocks and shares.

If you’d like to know more about how to go about this, make sure you read Top 10 cash ISAs for the new tax year.

• Watch our video: 3 tips when opening your first ISA

Forgetting about funding limits

If you want to enjoy the full benefits of your savings account, be aware that some accounts require a minimum funding limit.

For example, although you can open the Sainsbury’s Finance Easy Saver Account with just £1, if you maintain a minimum balance of £5,000 for at least two years, you’ll earn double Nectar points on all your Sainsbury’s shopping. If your balance drops below £5,000, however, you won’t qualify for this offer.

Some accounts may also reduce the interest you receive if your balance falls below a certain amount, so make sure you check the terms and conditions carefully.

Choosing an account with linked financial products

Finally, you should also be wary of savings accounts that require you to take out a separate investment product. The Santander Super Bond is one such account.

With this account, you can earn an interest rate of 4.5% on funds above £1, or 5.5% for funds over £250,000. However, to qualify for these top rates, you must invest the same amount into a separate qualifying investment product from Santander.

In other words, you'll have to make a big commitment to Santander, which could involve exposure to the stock market – something not everyone is comfortable with. And all because you want a good rate of return on your savings. Unless you were considering taking out one of these investments anyway, I would steer clear.

When you next apply for a savings account, make sure you read the terms and conditions carefully, and don’t get caught out by any of these blunders!

More: Earn a higher rate on your savings | Five ways to increase your savings