How to get a better rate on your savings

The highest savings rates always seem to come with strings attached.

But it might be worth tying yourself in a few knots to get them: so-called 'zombie accounts' that pay 0.1-1% are barely any different from stuffing cash into your mattress.

Not only are you missing out on an easy source of passive income, your money will actually be worth less this time next year because of inflation.

Play your interest rate cards right, though, and the cash will actually gain value.

Here's how to get your savings house in order in three steps.

1. Pay off any debts

Except in a few cases - with student loans, for example - paying off a debt will save you much more than moving to the best savings rate would ever make.

This is particularly true, of course, when the debt you're holding has a high interest rate. For example, let's look at the case of holding a £3,000 credit card debt over a year (paying off in full during that time) compared with keeping the money in a top cash ISA.

As you can see, even the returns from the best tax-free savings accounts are much lower than the interest of a debt like this.

Even taking into account interest lost, just paying off the credit card in a lump sum at the beginning of the year would save £174.

For the same reason, it can be worth those with savings who occasionally go into an overdraft, especially an unarranged one, moving cash from savings into their current account to use as an overdraft 'buffer'.

Going over into many unarranged overdrafts, for example, is likely to be charged at around £5 each time. Do that five times a year and that's £25.

£300 in a tax-free cash ISA over the same period would earn just £9.

2. Find the highest rates...
and make them work together

After debts are dealt with, there's the small matter of finding the accounts with the highest savings rates and making them all work together.

The best way to do this is to start with the highest rate, but hardest to access, accounts, put away as much as you can and then move on to the next highest, right down to your easy access rainy day piggy bank.

Using this technique the savings market looks something like this:

• ISAs: some of the highest rates, tax-free but only on up to £5,340 in cash during 2011/12
• Fixed rate savings: the highest rates when you pay taxes but you must lock the money away, Or..
• Easy access and regular savings: combine the highest rate on an easy access account with regular savings, some of the highest rate accounts but ones that require a monthly investment, for a strong return
• Easy access on its own: offering some of the lowest interest rates but good for short-term saving up

Let's look at those options in more detail.

Cash ISAs

ISAs are tax-free, high-interest and, brilliantly, they allow savings to build up over the years.

That means it's best to get started with one as soon as you can and even if you can't always put away the full tax year allowance.

It's also worth noting that even older ISAs should come under some scrutiny at this stage.

Many become zombies, charging meagre rates of interest, after a year or so but they could be earning the top interest rates, just like new cash ISAs, because the system allows ISA holders to transfer their cash to new deals without any loss of the tax-free benefits.

Find out more about how the account and the transfer process work in our ISA guide.

Fixed rate savings

Fixed rates can be the calm in the storm for savers.

When you sign up you know that your money will be earning a certain level of interest for a set time or, in the case of guaranteed rates, will always match the inflation rate.

Unfortunately, though what you gain in security, you lose in flexibility.

These usually only allow a few withdrawals a year, if any, without loss of the account's interest benefits and to make a withdrawal holders often have to give their bank up to 180 days notice (which is why instant access savings are sometimes called 'no notice' accounts).

These accounts are only suitable, then, for those who can safely stash away a lump sum without needing to touch it.

Regular savings

The best fixed rate savings deals, which lock money away for five years, offer an interest rate of just under 5%.

But the best regular savings accounts offer interest rates of up to 8%.

Why, then, are they only number three on our list?

It's because the high interest rate is a little misleading: account holders can only put a certain amount into the account each month, which means that their returns are limited.

However, regular savers still offer some of the best returns on the market and offer savers the opportunity to be rewarded for stowing some of their monthly wages away. Our guide to regular savings accounts explains the accounts more fully.

Easy access savings

For the best returns on a regular savings account, it's best to move the monthly payments to the regular saver from a top easy access savings account.

Even for those that just need quick access to their savings to supplement incomes, however, the best instant access deals can still make a real contribution to savings' worth.

Checking savings comparison tables for these deals is a good first step.

3. Automate for the best returns

Finally, having gone to all the trouble of putting your savings into a winning system, it's worth also taking some steps which will ensure that it doesn't fall apart within a few months or years.

Step one: start saving by direct debit

A fairly simple place to start is saving by direct debit and is especially worthwhile for those who can afford to put a little away at the end of every month.

Small amounts saved can add up quickly, and as advocates of backwards budgeting, it can remind us that wages left in current accounts often end up being accidentally spent.

Step two: set up rate reminders

As we've noted several times above, and statistics show many forget, the best rates often turn into some of the worst ones once their introductory period is over.

The problem is remembering when the rates end. An email reminder system such as the one offered by Google Calendar (look under 'notifications' and click 'add another reminder') can be worthwhile to jog your memory and other free services such as Memo to Me can even hassle you until you've actually switched to a better rate, like putting an alarm on snooze until you're really ready to wake up.