Big budget month day 29: avoid these savings mistakes

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 few 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.

That said, it can be difficult to use lenders’ websites and find your way around. So if you’ve got a fairly old account, have a read of The UK's worst savings accounts - as this lists the worst offenders.

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!

Right now, the market-leading easy access savings account is the Coventry Building Society Online Saver, paying 3.15%, including a bonus of 1.51% for 12 months. However, you can only make four penalty-free withdrawals with this account.

Alternatively, there's the ING Direct Savings Account, paying 3.01% which includes a 2.49% bonus for 12 months.

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.

While no-one knows exactly when interest rates will rise, it will happen. As a result, if you’ve locked into a four or five year fixed rate bond, you may find that after two or three years 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.

For a look at some of the best bonds on the market, read 24 top fixed rate bonds.

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.

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. You can invest up to £10,680 in an ISA (rising to £11,280 on 6 April). You can choose to invest the entire amount in a stocks and shares ISA, or, if you prefer, you can put up to £5,340 in a cash ISA (rising to £5,640 on 6 April) and the rest in stocks and shares.

If you’d like to know more about how to go about this and who's offering the best rates, make sure you read our ISA articles

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.

Some accounts may 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 'enhanced' rate of interest on your money on balances over £500. However, to qualify for the better rate, 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, we 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!

This is a classic lovemoney article that has been updated