Saving is easy once you know how

• Regular saving is the secret to long-term wealth.
• Get rid of debts first before starting to save.
• In light of the recent financial market problems, choose the 'safest' accounts with the best rates - see our picks here - and start a monthly standing order.

How to Save

There's really no secret to it - saving is all about living within your means and putting whatever is left over into a high-interest savings account.

However, there are a few rules you need to learn first. Once you have got those under your belt it's simply a question of putting money away regularly and being patient. Sorry - no recipes for instant wealth here! Slow and steady is the way you get rich in a safe way.

Simple Savings Steps

Step 1. Get rid of debts

If you have debts, other than those on 0% credit cards (or loans that you cannot pay off early without a penalty charge), then you have to pay those off before you start to save. It's because the amount you get charged in interest on debts is nearly always more than the interest you would make on your savings. If you are in debt now, have a look at the articles in our Borrowing & Debt section first to find out how to get out of it in the quickest and cheapest way.

Step 2. Cut the cost of living

In order to save you need to free up some money each month. Firstly cut down your essential bills each month. Go to our comparison tables and find cheaper insurance (on everything from you car to your travel), cheaper utilities, cheaper phone and broadband and cheaper banking.

Then cut down on your general spending. If you don't know where your money goes each month keep a spending diary for a few weeks and you'll soon find out! Start off with just one thing that you will cut down on - perhaps you buy a coffee every morning on the way to work. Replace that with a cool flask of your own brew and you will save about £12.50 a week. Or bring sandwiches to work instead of buying them (save around £25). Or have one less takeaway a week. All these things add up and cutting back on them will free up a lot more money than you could imagine.

Step 3. Set up savings pots

Saving is for the short-term (investing is for the long-term and you can do that once you have set up a savings 'safety net') and you can save for various things. However, one thing you must do is to set up a main 'safety net' savings account. This is money you save up to cover you and your family if everything goes pear-shaped (you lose your job or get sick for example) and there's no money coming in for a few months.

So this is what you should do:

1. Start putting money regularly into a high interest account which will be your 'safety net' savings. Keep saving there until you have enough to cover you for three-six months if you don't earn anything.
2. Set up another high interest account and call that your 'big ticket' account. This is where you will put a bit of money in each week or month to save up for big things like a new kitchen, a car, a good holiday and Christmas. In fact, you could set up a lot of different accounts for different goals if you like - nothing to stop you having a "Christmas savings account", a "holiday savings account" and a "new kitchen savings account" etc.

Getting the right account

Once you've put your saving processes in place you need to get a high interest savings account to put all your money in. This sounds like a doddle. However with so many products on the market, it can be a confusing choice. Going for the highest rate isn't always the answer. There are four main categories of savings account:

• Tax Free Savings

The first savings account everyone should get (after your savings safety net) is an ISA. These accounts are tax-free which means you do not pay tax on the interest you earn. However, if you go for a shares ISA, using the full £7,200 annual ISA allowance, then you can't open a cash ISA as well.

Each year the government sets an ISA allowance for the financial year (April 6th to April 5th). This year the full ISA allowance is £7,200. You can put the whole amount into a shares ISA or you can put up to £3,600 in shares and up to £3,600 in a cash ISA. You can't put the whole £7,200 in a cash ISA.

You can get instant access cash ISAs. However you are only allowed to put in up to the amount at which the ISA allowance is set. This means if you put in £3,600 in April and then you take out £600, you can't put it back in during that financial year as you have already exceeded your allowance.

You should always use up your ISA allowance first before opening any other savings accounts.

Find out more about cash ISAs in our full article here.

• Flexible Savings

The first, most basic high interest savings account is the flexible savings account. Flexible means you can put as much in and take as much out as you like. You can do it whenever you want, without having to give the bank notice.

If your funds are instant access, you will usually have a cash card that you can use to withdraw the money from an ATM. Internet accounts often don't have cash cards, and you have to instead transfer your money into another account and then withdraw it. This can take up to three working days and so they are not called instant access. But you still can move your money around as you please - there's just a slight delay until you get your hands on it.

To have flexibility with your savings, you have to say goodbye to the highest rates. However some of the best flexible accounts around at the moment are offering in the region of 6.50% AER.

• Regular Savings

Regular savings accounts are designed to help you put away a certain amount each month and earn interest on it. They are really good if you find yourself with some money left-over every month after you've paid all your bills.

With a regular savings account there will be a minimum amount you have to pay in each month and a maximum amount you are allowed to pay in. If you fail to make a payment there will be a penalty.

However the banks will pay you well for this rigidity. The best rates for regular savings now are around the 7.75% AER mark. The only downside to regular savings is that the maximum deposit means you cannot save big amounts in these accounts.

• Fixed-Rate Savings

Fixed-rate savings offer juicy interest rates in exchange for keeping hold of your money for a fixed period of time. Over this period the interest rate at which you are paid is also fixed. The fixed-rate periods can be anything from six months to several years.

You can make a deposit when you first open the account and this money is then bound until the fixed-rate period comes to an end. This means you can't touch it, whether it's to make a withdrawal or just add to it.

Because the banks can use money to invest elsewhere and then make themselves money, they will pay you a good rate. The highest bonds around at the moment are offering around 7.2% AER.

However there is an element of risk with fixed-rate accounts. If you take out an account and then interest rates fall, you are laughing as you retain your high rate. However, if you take out an account and then rates rise, you will still be lumbered with your low rate.

For more information about fixed-rate savings click here.

Other types of savings accounts that can come under these four headings are:

• Internet only accounts

These are accounts that can only be accessed online. This means that all deposits and withdrawals have to be done electronically, via your other bank accounts. There are many different types of savings accounts available online. Because they do not have the overheads of running high street branches they often offer very competitive rates.

• Monthly Income Accounts

These are accounts that pay interest monthly, as opposed to annually or on account maturity. Different providers offer different levels of flexibility for their monthly accounts. You can get both instant and limited access accounts. For more about monthly savings accounts click here.

• Notice Savings Accounts

Notice savings accounts require you to give notice before making withdrawals. Standard notice periods are seven, 14, 30, 60 and 90 days. If you fail to give this much notice there are penalties, like losing some interest.

Although you have to give notice, this doesn't mean that these accounts are not flexible. You can add and withdraw as much as you would like, you just need to let your bank know in advance.

Which is right for me?

The savings account that is suited to your finance depends on what you want to do with your money. Do you want to be able to access your money quickly or do you want the temptation to spend to be taken away? Do you want to be able to make quick withdrawals or are you happy to give notice? Do you want to save regularly or just here and there?

The important thing is to get the market leader for the type of account that is best for you. It's not always easy so we've written a whole article on how to make the most of your savings - read it here.

Things to remember

• Keep an eye on your accounts

Keep an eye on your savings accounts. Financial companies often drop their rates without warning, so if this happens to you, move to a better account.

• Protect your savings

Also, if you have more than £50,000 in savings you might consider splitting your money into different accounts with different banks as only the first £50,000 of your money is fully covered and fully refundable if the bank fails.

• Always calculate the tax

Remember to take tax into account when calculating how much you will make on your savings. Any money you make on your savings will be taxed by the government so the interest rate you see is usually not quite the amount of money you will make in the long-run, unless you have wrapped your savings in an Isa. See our comparison tables for the best cash Isa rates.

National Savings & Investments also have tax-free savings. They are a particularly safe place to put your money as they are Government-backed, but their interest rates tend to be low.

Savings Alternatives

If you want to save with the chance (albeit slim) of big winnings, consider premium bonds from National Savings and Investments. The average return is around the same as (or a little less than) you would get from a normal building society, but returns are tax free, you don’t lose your money as you do with normal gambling, and there’s always the possibility that you could win the big one.

If you don’t like the idea of giving your money to a faceless bank, become your own bank and lend your cash to others with a website called Zopa.com. Through Zopa your money is lent to people to buy a car, do up their house or consolidate their loans. You get to choose the interest rate you want and how long you want to lend the money for. Note that Zopa has a strong preference for people with good credit ratings, such as homeowners and people with good credit ratings. It's different, so if you want to try it out, click here for a new lending experience.

Set up an account with your local Credit Union, particularly if you want to put a small amount away every month for Christmas. They have special Christmas savings accounts as well as Isas, proper bank accounts and, now, even mortgages. Find your nearest one here.

What to do now...

Open up at least one high-interest savings account now!

The financial markets are unstable at the moment and we are all concerned about putting our savings into a bank that then goes bust.

First what you need to know is that the government will guarantee the savings you invest in each individual bank or building society up to £50,000. That means that even if you have £50,000 in one bank and another £50,000 in a different bank, your full £100,000 will be covered. However if you have £100,000 in one bank, only £50,000 is covered.

The only drawback with this compensation scheme is that you will have to wait for the compensation to come through and during this period your money won't be earning interest.

So if you need your money short-term then you should invest in a 'safer' bank - see the Moneymagpie guide to safe investment here.

If you are investing long-term then here are the best rates on the market right now:

Rates

The best rate around is the ICICI 7.2% AER 12 month fixed-rate bond. The minimum deposit is £1,000 but there is no maximum deposit. It's not a flexible account though, so you won't be able to access the money you deposit during the 12 months. Click here for more information.

For flexible savings, the Bradford & Bingley eSavings account pays 6.51% AER on balances between £1 and £2million.

Want to know more? Now go to...

• Savings accounts (comparison table)
• Cash ISAs
• Fixed Rate Savings
• How to save if you don't have any money
• Savings Safety Net