Here are four common mistakes savers make – and how they can be overcome.

• Left Overs

Many people take a retrospective approach to saving. They try to limit their spending as much as possible and save any left over money at the end of each month.

A better approach is to earmark a certain portion of your income as savings from the word go. Try to calculate how much you can realistically afford to save every month, then factor this in to your monthly budget.

“I’d recommend establishing an automatic transfer from your current account to your savings vehicle, on or near payday – simply set it, and forget it,” says Kevin Mountford of MoneySupermarket.com.

“You’ll almost invariably have less money to transfer if you wait until just before payday to top up your savings, rather than moving it immediately.”

• Concentration

Even people with dedicated and successful saving strategies can make the mistake of concentrating their funds in a single place. If your savings are intended to meet a number of financial objectives, it is important that they are divided to reflect this.

For instance, if you are saving for a new car while also building up a dream holiday fund and keeping some money aside for a rainy day, it’s important the money don’t become muddled. If it does, you could end up spending important emergency cash when you finally buy your new set of wheels. Keeping your savings separate prevents money being mistakenly earmarked twice.

“Most financial institutions – whether banks or otherwise – will allow you to split your funds in this way, and name them for ease,” says Andy Webb of the Money Advice Service.

“Some can go overboard and segment their savings into far too many individual categories. For the sake of clarity, limit yourself to four at a maximum. You can always review these groupings if and when your objectives and situation changes.”

• Incentives

Many banks and building societies offer incentives such as high introductory rates, cashback and lump-sum signup bonuses to ensnare new customers. While these enticements can be attractive, it is important not to be seduced by offers that are only superficially alluring.

Banks tend to work harder on securing new customers rather than actively trying to retain existing ones. Often, the appealing aspects of an introductory are only temporary (say, a high rate offered for only six months), or illusory (cashback amounts offset by account fees and other charges).

Banks can cut many of these benefits without informing customers. As YourMoney.com exposed in February, the overwhelming majority of lenders have exploited regulatory loopholes to cut customers’ savings rates in recent years. Figures reveal that 43 per cent of savings accounts pay less to existing customers than new ones.

“So-called ‘Best Buys’ can soon become a poor choice, with rates decreasing once the bonus period has ended or when the provider decides to cut their rates without informing their customers,” says Jonathan Kernkraut, retail and business proposition director at Metro Bank.

“Checking the small prints is as important today as it has ever been. If something looks too good to be true, it may well be. Always read the terms and conditions, and consider the implications of any short term incentive.”

• Risk Aversion

According to data from Henderson Global Investors, half the UK’s collective financial wealth – £729bn – is held in cash accounts. Since 2009, the overall average interest rate paid on this huge cash wealth has been 0.97 per cent – compared with RPI inflation of 19.8 per cent between 2010 and 2014.

So, while around £36bn of interest was earned by savers on their cash deposits during that period, inflation consumed close to £116bn, resulting in savers collectively losing £80bn.

The UK cost of living has also more than doubled since 1990 (+122 per cent), but cash in instant access accounts has returned just 69 per cent in compound interest. That means £1,000 invested in 1990 is worth £760 today.

In only five of the last 25 years have instant access account interest rates exceeded inflation, meaning that savers had an 80 per cent chance of seeing their cash fall in value in any one year in real terms. In the same period, the total return on UK equities was 700 per cent, and on global equities it was 470 per cent.

“Human beings are naturally risk averse – it’s a cognitive bias that is hard to overcome when we consider our savings,” says James de Sausmarez, director and head of investment trusts at Henderson Global Investors.

“In recoiling from risk, we unwittingly suffer the corrosive effect of inflation. You can be near certain you will lose money over the longer term by putting your savings in cash accounts. British savers should at least be considering investing their savings to potentially enjoy higher returns. There is potential for peoples’ savings to work much harder if additional risk is accepted.”

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