Good habits that last a lifetime can deliver rich rewards

As a nation we are now putting away less money as a proportion of our income than at any other time since the 1950s, according to alarming new figures which show savings levels have plummeted in the past few months. But with an economic downturn looming, it is more important than ever to have a financial safety net.

The latest numbers from the Office for National Statistics show we are turning our backs on saving, with the amount put aside every quarter down by two-thirds in just three months. Households in the UK saved just 1.1 per cent of their disposable income in the first quarter of 2008, a huge drop from 3 per cent in the fourth quarter of 2007 and 6.3 per cent in the middle of 2006.

But we are hardly spending the difference frivolously. Food prices are rising at a rate of 9 per cent year on year, according to economic analysts the Alliance Trust Research Centre, but in the case of some basic food groups, such as dairy products, annual inflation is as high as 17 per cent. Utility prices are also on the rise again, with gas price inflation currently at 7 per cent on last year and electricity running at almost 10 per cent. And at the petrol pumps, an annual rise of almost 20 per cent is hitting everyone hard.

We certainly aspire to save more. A survey from the government-backed savings provider National Savings & Investments (NS&I) shows that the amount Britons would like to save each month has never been so high, but these aspirations are not being reflected in what people are actually managing to put away. In spring 2007, we were hoping to save £178 a month. A year later that had gone up to £195. But the average amount actually saved barely rose from £78 to £82 per month.

And this is no time to be without emergency funds should you need to cover unexpected costs, or find yourself suddenly without an income.

"Failing to save money, however little, would be a very risky strategy right now," says Sean Gardner of the financial information website MoneyExpert.com. "Re-evaluating your expenses and thinking harder about what you spend your money on often means you can save £30, £40 or £50. That can make a real difference over time."

Ironically, given that so many people are struggling to put cash aside, interest rates on savings accounts are rising all the time, with banks and building societies, hit by the credit crunch, offering ever more attractive deals to pull in much-needed funds.

While it is always important to find a good rate of interest for the money you have left at the end of the month, the savings strategy that best meets your needs will depend on your personal circumstances – in particular, the stage you've reached in life.

Teens

It's never too early to get the savings habit. "But children's savings plans should be all about short-term arrangements at the best possible rate," says Peter McGahan of the independent financial adviser (IFA) Worldwide Financial Planning. "Look for the best deals available on instant-access accounts with small minimum payments."

Alliance & Leicester, Birmingham Midshires and Abbey all offer such accounts, paying 6.5 per cent on a minimum investment of £1.

Older teenagers saving towards university, a gap year or leaving school could benefit from a regular saver account. These will often give you top rates – Halifax has recently launched an account offering 10 per cent interest, although your money is locked in for a year. The Halifax account is open to 16-year-olds and over but watch out for age restrictions: a number of similar accounts will only accept customers aged 18-plus.

Twenties

New graduates usually have expensive debts left over from their student years before embarking on a savings regime. Interest rates on credit cards, for example, can easily be 20 or 25 per cent.

"Once those debts are cleared you could put away a little every month in a regular savings account, and you should always take advantage of the tax-free savings an individual savings account (ISA) can offer," says Mr McGahan. "The best ISA rates include Barclays, HSBC and Icesave at 6.25 per cent per annum."

Those in full-time jobs should aim to set up a rainy-day fund; IFAs usually recommend putting aside three to six months' salary in a high-interest instant-access account.

But the best earnings vehicle for your cash at this time of your life is without doubt a pension. You may not be able to get at it yet, but it is precisely because it has a long time to grow that you will get so much out of it.

"The money someone in their 20s puts into a pension accounts for around half of their final pension pot," adds Mr McGahan. "And if your occupational pension scheme also offers a employer contribution, that is free money you can't afford not to take."

Thirties

You may have managed to get on the property ladder by your 30s, and even if you haven't, you may well own a car. "[In that case, you'll] have the financial liabilities associated with those possessions," says Alex Pegley of IFA Calculis. "It's vital to have cash to cover repairs or replacements."

If you have enough savings to meet your immediate needs, you should be able to get a better rate of interest on additional funds by opting for an account such as that offered by the Derbyshire building society, requiring 60 days' notice to avoid loss of interest but paying 6.55 per cent on £250 and above.

If you are considering starting a family, you should be taking a longer-term view of savings. Once your emergency fund and ISA are in place, Mr Pegley advises looking for the best deals for three to five years from investment bond account providers. First Save offers around 7.10 per cent per annum on a minimum of £1,000 over three years.

Forties/Fifties

By this time, many people are established in their own home. Your mortgage should be taking a smaller proportion of your income, and your cashflow should be more predictable.

"At this age you are likely to have your largest percentage of disposable income," says Mr Pegley. "Now may be the best time to look at equity-based investments over the longer term, particularly if you are considering helping your children through university or on to the property ladder. A diversified investment portfolio in equities should allow you to enjoy relatively steady growth over several years."

Your pension should be reviewed every two or three years to keep you on track for a comfortable retirement.

Post-retirement

Inheritance tax (IHT) will begin to become a major issue for many homeowners in this age group, who should discuss with an IFA ways to protect savings and investments from the effects of the dreaded 40 per cent "death tax". Placing savings for children in their own designated accounts, in trust or offshore, could be the way forward, as these can fall outside your estate when it comes to calculating IHT liability. "You may plan to blow the lot," acknowledges Mr McGahan, "but assuming you are enjoying a decent lifestyle, the most tax-efficient distribution of your assets for your loved ones should be the driver for your savings vehicles in retirement."

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