There's no two ways about it: saving is a slog, and it’s made even harder by a market that has been stagnant for more than a decade.
While there was a glimmer of hope when the Bank of England hiked the base rate in November, interest rates have remained pretty underwhelming.
Given the amount of dedication it now takes to get a decent sized savings pot together, it’s even more important that you get it right.
Even prudent savers can make mistakes, so make sure you don’t fall into these traps so you can get the most out of your money.
Stashing loads of cash
All too often, people accumulate a substantial pile of money, which they leave in a deposit account. Many savers favour the simplicity and safety of deposit accounts, says Liz Bottomley, managing director of private banking at Arbuthnot Latham.
However, she points out that – while you should always have an emergency cash buffer – you could be doing yourself a disservice by holding large amounts beyond this.
The same applies to cash Isas, which of course offer tax protection, but currently provide next to nothing in the way of return. For longer-term savings, Bottomley says you should consider other asset classes. “For those looking to self-manage, consider a stocks and shares Isa where you can get the tax benefit on something with a better growth prospect.”
After years with inflation barely above zero, it’s now come back with a vengeance – making it more imperative that you protect the value of your hard-earned cash.
“To most people, inflation is an arbitrary measure,” says Simon Longfellow, head of Janus Henderson’s Steps to Investing. “But despite knowing that £10 today can’t buy what £10 could even five years ago, people still insist on saving huge amounts in cash.”
Longfellow points to figures which indicate £1.3 trillion was being held in cash at the end of last year. “Even if you take rainy day money into account for every household – say three months’ salary – that’s still £963bn dwindling in value. So if you have more than three months’ salary in cash, think about how you can earn a better return.”
Failing to regularly review your pension
The mountain of pressing financial commitments – from mortgages to school fees – means pensions often end up taking a backseat.
But Jade Connolly, head of advice at Ascot Lloyd, warns that many professionals find that their existing level of pension contributions will not be sufficient to fund them in retirement. “Reviewing and increasing contributions during your 40s will be far less dramatic than waiting until your 60s,” she says.
But on the flipside, Connolly warns that there are also circumstances where individuals may be paying too much into their pension, particularly if their salary has increased and they now breach the £10,000 limit for annual contributions. “The tax consequences for over-contributing can be significant and therefore care should be made to review contributions regularly.”
While other finances can take priority, don’t let your pension strategy gather dust at the bottom of the pile.
Thinking investing is riskier than it is
Research from Steps to Investing indicate that people with cash savings between £40,000 and £140,000 think investing in equities is as risky as putting money on black or red in a game of roulette.
And yet, figures from insurance giant Axa show that over the past two decades, a 10-year investment in the FTSE 100 had a 95 per cent chance of making money. “They’re pretty good odds,” says Longfellow.
“Perhaps even more compelling is that since 2000, the FTSE All-Share has delivered an average return of 153 per cent, compared to just 32 per cent from cash saving."
So while your savings pot might look pretty healthy, don’t dismiss the returns that can be made by investing.