How To Save Without Breaking The Bank!

Rising food, fuel and energy prices are hitting finances hard. So how can you save when you're already stretched?

Thanks to rampant inflation and the rising cost of living, savings are going out the window. Everything seems to be getting more expensive these days. Food, fuel and energy prices are spiraling while mortgages -- normally our biggest monthly bill -- are becoming increasingly costly too.

The credit crunch has a lot to answer for. Now Nationwide say because of the current economic troubles, two-thirds of us aren't able to save as much as we need.

How stretched are you?

Budgets are certainly under more pressure than usual. If you don't have much spare cash, the trick is to save little and often -- even if it's only £20. Although that might sound like a pathetically small amount, it's still worth putting away anything you can afford. Then all you need to do is find the best possible return on your money.

Let's say you save that £20 every month into one of the best buy instant access savings accounts. Here you could earn a rate of 6.52% AER with Birmingham Midshires e-Saver Issue 2 or 6.51% AER with Bradford & Bingley Internet Saver Issue 3. Both of these accounts are great for small savers because they can be opened with just £1.

With these competitive interest rates, you'll have built up savings of around £513 after two years. True, that's not quite enough to retire on, but at least it's a start. Hopefully you'll be able to increase your savings over time. If you can step up your savings to £50 a month, after two years you will have built up a reserve of over £1,280. This amount could really make a difference in an emergency.

Plus, once you get into the habit of saving, it should become a lot easier. The best thing to do is set up a standing order at the beginning of the month into your chosen savings account. That way, you won't even miss it. And remember to top it up whenever you can if you have a bit extra left over at the end of the month.

What about regular saver accounts?

Regular savings accounts often pay really impressive fixed rates, but there are catches.

Firstly, you'll need to deposit cash every month, usually for a year. If you skip a month you may lose some interest so you should only commit to regular savings if you're sure you can keep it up.

Secondly, these accounts don't normally allow withdrawals. But that means, if you'd prefer an account that forces you to keep your hands off your savings, this sort of account may be ideal for you.

Finally, the best accounts can be pretty exclusive. They might only be open to existing customers or you'll need to take out other products in the bank's range to become eligible. 

For this reason it makes sense to check out what your own bank has on offer. Some provide special loyalty accounts with generous preferential rates if you already bank with them. For example, HSBC's Premier, Plus and Passport current account customers will enjoy a fantastic rate of 10% fixed for 12 months when they open an HSBC Regular Saver account.

If you aren't lucky enough to qualify for a loyalty account, try Barclays Monthly Savings instead. As long as you don't make any withdrawals, you'll get an attractive fixed rate of 7.75% AER for a year on monthly savings of £20 to £250.

But remember after the year is up, the balance will probably be moved to an account with a lower interest rate, so you may need to move your cash elsewhere to keep earning a top return.

Sweeping

Sweeping is another way you can keep your savings topped-up. Some current accounts offer a sweeping facility where money left in your account at the end of the month is automatically moved to a linked savings account. A number of banks -- including Abbey, HSBC and First Direct -- allow sweeping, but make sure you check the interest rate on offer is competitive.

Have you used your ISA allowance?

If you haven't already done so, I would suggest you think about using your Cash ISA allowance for the tax year to earn a great tax-free return. Many accept small monthly contributions making them an ideal way to build up your nest egg.

One of the best cash ISAs available at the moment is HSBC's Cash e-ISA which pays a top rate of 6.25% AER. To earn an equivalent return from a taxable account you would need an interest rate of 7.81% for a basic rate taxpayer and 10.42% for a higher rate taxpayer. Better still, you can save as little as £10 a month.

If you thought vast quantities of ready cash are needed to make saving worthwhile, think again. The important thing is you save what you can, when you can. Choose a market-leading savings account, then sit back and watch your money grow.

More: Don't Hand Your Cash Over To The Government | Don't Get Caught In This Savings Trap! | Compare savings account here at The Fool