FOOL'S EYE VIEW
Three Steps To Becoming A Super Saver

By Cliff D'Arcy
April 14, 2005

I've been trying to come up with a foolproof (or should that be Foolproof?) way to become a better saver.

Of course, there's no point even thinking about saving if you're paying off expensive debts. For example, if you have £2,000 outstanding on your Barclaycard and £2,000 in your savings account, you'd be wise to use one to pay off the other. Apart from having a reasonable-sized emergency fund to fall back on when fortunes frowns at you, all your efforts should go towards paying off the credit and store cards, overdraft and so on.

But, equally, there's no point jumping onto the savings ladder without first making an effort to put all your financial ducks in a row. The three-step strategy that I'm about to describe is very simple, and yet it's a very powerful way to save far more than you would without a similar approach.

The trick is to think like a company accountant. Your mission, should you wish to accept it, is to increase the income of "Me PLC", reduce your expenses, and then find a knockout account in which to stash this extra cash flow. Easy, really!

So, let's go through each step:

Step one: increasing your income

Here are four ways to boost your income:

• Get a bigger pay rise. Most people take what they're given, but smart cookies take time to put together a business case for a better rise. Learn more in Get A Bumper Pay Rise This Year.
• Pay less tax. By reshuffling your finances and earnings, usually you can recoup money from the taxman. Learn more in Ten Ways To Pay Less Tax.
• Take in a lodger. Under the government's Rent a Room scheme, you can earn up to £4,250 tax free each tax year from letting a room in your home. Learn more in Making Extra Money From Lodgers.
• Make sure that you're claiming all the State benefits that you can. To learn more about such benefits as Child Benefit, Working Tax Credit and Child Tax Credit, visit independent benefits-enquiry website EntitledTo, or call the Benefit Enquiry Line on 0800 88 22 00.

Step two: decreasing your expenditure

There is no shortage of money-saving tips to help you to produce a bigger monthly disposable income. Here are four to get you started:

• Change your mortgage. For most homeowners, their home loan is their biggest expense and, therefore, where the biggest savings can be made. Learn more in Cheaper Loans Mean Happier Homes!
• Find lower insurance premiums. Very few people bother to shop around for Best Buy life, home, motor, travel and payment protection insurance. Instead, millions are suckered into buying cover from the most expensive providers: the high-street banks. Start your search for cheaper protection with a visit to our Insurance centre.
• Switch gas and electricity suppliers. Two out of three UK households have never switched fuel provider, yet Fool partner uSwitch reckons that the typical saving is around £170 a year. Learn more in Energy Prices Soar In 2004.
• Drive down the cost of motoring. It costs over five grand a year to run a typical private car, making transport costs one of our biggest outgoings. Massacre your motoring costs by reading Tremendous Tips For Motorists!

We can help you to find cheaper mortgages, insurance and fuel suppliers.

Step three: finding a great account and filling it up

So, if you've followed steps one and two, you should be living well within your means and, therefore, have a decent monthly sum to save. The next step is to choose an account – and choose wisely! Here are three types of account to seek out:

Cash mini-ISA

If you like earning top rates of interests and prefer to avoid paying tax, your first £3,000 saved each year should go into a Best Buy cash mini-ISA. Don't be anxious about the fancy name: a cash mini-ISA is simply a savings account that pays tax-free interest. Because these are so attractive to taxpayers, the government limits you to putting £3,000 per tax year into a cash mini-ISA.

What's more, you can open a new cash mini-ISA every tax year (they begin on 6 April each year) and you don't have to stick with the same provider. Indeed, it's best to be a "rate chaser" and look around for this season's top-paying accounts. Also, if your other cash mini-ISAs aren't earning interest of at least 5% a year, you can transfer them to a Best Buy account. In summary, a cash mini-ISA should be the core savings account for all serious savers.

We have three accounts paying 5% or more tax free in our Cash Mini-ISA centre.

Easy-access account

As for the lucky few who can afford to save over £3,000 a year, they need to find a Best Buy easy-access savings account. Personally, I don't touch notice accounts (which tie up your money) or fixed-rate accounts, because most have rates that are inferior to the best no-notice accounts. For the highest rates, forget about branch access: the real rewards come from telephone- or Internet-based accounts. In a quick search of the Web, I found ten accounts paying over 5% a year before tax (a few paid up to 5.4%) –does your savings account hit those heights?

We have accounts paying up to 5.35% AER in our Savings centre.

Regular-savings account

Disciplined savers can go one step further in their search for the best rates of interest. Several banks and building societies offer regular-saving accounts, which usually require you to make twelve consecutive monthly repayments, give or take a few. These pay the very highest rates; in a trawl of the Internet, I found ten accounts paying from 5.30% AER before tax to over 7% AER.

The Coventry BS Family 1st account, which pays an unbeatable 7.25% AER on Child Benefit money, is available via the Fool.

I hope that these three steps help you to get to savings Heaven (with apologies to Eddie Cochrane)!

More: Find better cash mini-ISAs, savings accounts, mortgages and insurance policies.