Published: 23/09/2009

It's not surprising that many people are confused when it comes to choosing a savings account. Banks and building societies offer a vast range of products with different interest rates and with a mind boggling list of options and terms and conditions.

So where do you start?

Well it's probably easier if you understand the ideal savings scenario and then gradually try to aim towards it. It's important to have some of your cash in an easy access account for emergencies. You also should look to take advantage of your annual tax free savings allowance, so it may be that you initially keep your emergency fund in an instant access ISA and kill two birds with one stone.

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Once you've got a reasonable sum in your easy access account it's time to look at longer term saving with fixed rate bonds. Unfortunately some people assume a fixed rate bond is some sort of complex equity based investment as opposed to a simple savings account. Because you don't have access to your cash for the term of the bond (anything from 6 months to 5 years) the provider compensates you with a higher rate of interest than you'd receive on an easy access savings account.

So the ideal situation is to have a savings portfolio consisting of an emergency fund (low rate of interest but easily accessible), some tax free savings in a variable or fixed rate ISA (tax efficient) and some longer term savings where your funds are tied up but where you receive a higher return.

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If you're starting to save for the first time, whether it's for something specific or just to start to get some money behind you, it's important to get into the habit of saving on a regular basis. If you set up a standing order to transfer money to your account every week or month as soon as you get paid, it gives you the discipline to save regularly and removes the temptation to fritter your cash away.

There are a couple of options for your regular savings - a cash ISA with instant access would normally be your first choice. However with the best instant access ISA rate currently at 2.65% tax free, you can get an almost identical return (after tax) with the standard internet savings account from Egg paying 3.25%.

You can obtain a far higher rate with Regular Saver accounts which are offered by a handful of providers, but beware, they come with some pretty strict terms and conditions. For example Halifax is currently paying an attractive 5% rate but you must make a single monthly payment of between £25 and £500 every month for 12 months and you are not allowed to withdraw any of your money during the year.

If you fail to stick to these conditions the rate drops to a derisory 0.25%, so don't opt for this type of account unless you're absolutely sure you can stick to the rules for the full duration.

Compare regular savings accounts

If you've already accumulated a reasonable savings pot and you're now looking to put some of this into a fixed rate bond, you're faced with more choices and more decisions to make. Interest rates on fixed rate bonds have picked up quite nicely since the low point seen in March 2009, however the biggest decision for most people is how long to invest their money for.

At the moment you can get a rate up to 3.85% for 1 year, 4.40% for 2 years, 4.70% for 3 years, 5.15% for 4 years and 5.40% for 5 years.

The temptation would be to opt for the highest rate although this means no access to your money for a full five years. With base rate still at a record low of 0.50% it is likely that rates will start to rise again, the only thing we don't know is quite when and how quickly they will increase. The rates on offer for two or three years look quite attractive at present and although you can currently bag an extra 0.75% for a five year fix, that decision may come back to haunt you if rates were to rise by say 1 or 2 percent in a couple of years from now.

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