Save on a regular basis

Even a modest amount of interest can make a big difference. For example, deposits of £200 a month into a cash individual savings account paying 3% will have grown to £7,540 at the end of three years. Of this, £340 will be pure interest.

Although the financial incentives are there, it does take discipline to direct some of your hard-earned cash into a savings account.

Michelle Slade, spokesperson for financial data website Moneyfacts, says there are ways to make this easier. She recommends setting up a direct debit that takes the money out of your current account on payday.

"This helps to reduce the temptation to spend it," she says. "You can also make it easier to save by going for a notice account or a fixed-rate deal, both of which make it harder to access your cash."

Because of its tax status, a cash ISA should be your first port of call. You can save up to £5,100 in one in the 2010/11 tax year, equivalent to £425 a month.

"If you pay tax, or might pay tax in the future, go for a cash ISA before other savings accounts. Interest is paid gross so your savings grow faster," says Slade. 

For example, as of 25 May 2010, Barclays Golden ISA was popular, paying 3.06%. To get a taxed account paying the same amount of interest, a basic-rate taxpayer would need to find an interest rate of 3.83% and a higher rate taxpayer, 5.10%.

Once you've used up your ISA allowance, it's worth looking at standard savings accounts. As well as deciding whether you'd rather have easy access or tie your money up, you might also want to consider a regular savings account.

"You will be tying your money up with these, usually for around a year, and there can be caps on the amount you save, but the rates are often attractive," adds Slade.  

For example Northern Rock's Fixed Rate Regular Saver pays 5% as long as you commit to regular savings until June 2011. The maximum you can save is £250 a month.

Whether you're looking for an ISA or a standard savings account, Slade also recommends checking with your current account provider.

"There can be some good deals around if you already bank with the provider, although it's usually not worth switching current accounts to get a better deal on your savings," she explains.


Fixed rates versus easy access

Deciding whether to tie your money up with a fixed-rate savings account or go for one that offers easy access will be determined by a number of factors. Ask yourself the following questions:

What's the rate?
Having the highest possible rate will enable your savings to grow faster. According to Moneyfacts, although the best instant access account, offered by Manchester Building Society, pays 2.66%, you'd get 3.25% on the United National one-year fixed deposit or 5.00% if you're happy to tie your money up for five years with the Coventry Building Society, State Bank of India or ICICI Bank UK (rates correct when going to press). 

What are you saving for?
Think about your saving goals. If you're saving for a fortnight in the sun this summer, easy access is probably your best bet, allowing you to pay for flights and so on. If it's for a house deposit in a few years, tie it up and earn the extra interest.

How disciplined are you?
If your good savings intentions never last until next payday, plumping for an account that ties up your money will help develop your financial discipline.