5 Savings Mistakes to Avoid

Regardless of why you're saving, be sure to avoid these common errors.

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You know that have a savings plan is important. Whether you are saving for retirement or college, it's important to consider your options and stick to your plan. Unfortunately, there are some obvious, and some not so obvious, pitfalls that could cost you dearly. Here are five savings mistakes to watch out for.

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1. Waiting Too Long

No matter your savings goal, it is important to start now. No more excuses. Waiting too long to start saving, whether it's for a home down payment, retirement or a vacation next summer, cost you money in the form of compound interest. You've seen those comparisons that tell you that you could have more than $500,000 socked away, instead of $245,000, if you just started saving for retirement 10 years earlier. The longer you wait to save, the less time the magic of compound interest will be working for you.

2. Neglecting Tax Advantages

Depending on what you are saving for, there are might be tax advantages to your savings. Retirement accounts come with tax advantages. While you won't get a federal deduction when you contribute to a 529 college savings plan, some states offer state tax deductions for contributions. Consider your savings goal, and determine whether or not there is a tax advantage associated with it.

3. Settling for a Traditional Savings Account

These days, with high yield money market accounts, savings accounts, and CDs, there is no reason to settle for a traditional savings account. Indeed, it is possible for you to do much better than the yield you are getting for a traditional savings account. While having some of your fund in a traditional savings account can be helpful because of its easy access and liquidity, the bulk of savings should be in the high yield account. If you are saving for college or retirement, you should look beyond savings and consider other types of investment that can help you build your savings a little bit faster (although you will have increased risk).

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4. Forgetting About Inflation

Remember that inflation can erode your real returns in savings. Inflation is a reduction in your buying power. As prices rise, the amount that you can buy with a dollar decreases. Inflation can eat away at your savings, causing problems down the road. Indeed, if you are counting on a 6% return (optimistic right now, I know) on your retirement account, you need to realize that the real returns will be lower, since inflation historically averages somewhere between 2 percent to 4 percent a year. When putting together your savings plan, make sure you account for the negative effect of inflation.

5. Not Letting Your Saving Keep Pace with Your Income

Many people forget to increase their savings when they start making more money. However, it is important that your savings keep pace with your income. It is important to start your savings habit early on. You might only be able to set aside a few dollars a week initially. But, as many of us move through life, we begin seeing an increase in income. As this happens, you should re-evaluate what you are setting aside, and increase the amount.

Can you think of other savings pitfalls?

Pinyo is the owner of Moolanomy Personal Finance Blog, which covers a wide range of personal finance  and investing topics, with features that include reviews, comparison guides, and Q&A sections.