How much should a wise guy set aside?

As interest rates rise, Melanie Bien reports on finding the right savings account

After years of putting up with meagre returns, savers are finally enjoying improved rates of interest. The Halifax is the latest bank to offer an attractive deal, paying 6 per cent to those savers prepared to commit themselves to investing a set amount each month for a year.

However, finding a good rate of interest is just one part of the challenge, as many people aren't sure exactly what amount they need to keep in a savings account. For while you will be taking a chance if you don't set enough cash aside for emergencies, such as the boiler blowing up, you can also put by too much. You won't benefit from having tens of thousands of pounds languishing in a savings account.

The right level of savings will vary from person to person, depen- ding on age, situation and attitude to risk, says Anna Bowes, savings and investments manager at independent financial adviser (IFA) Chase de Vere.

"A younger person with a regular income should aim for a couple of months' take-home pay in an easy access savings account," she advises. "But as you get older and there is a strong chance that you will need access to more cash at short notice, you should increase the amount you have on deposit."

However, even advisers disagree over how much is enough. Philippa Gee, investments director at IFA Torquil Clark, argues that two months' income is too little, and you should aim to keep three to six months' worth stashed in a savings account, particularly if you don't have income protection or critical illness cover. But she does admit that, "for most people, this is a huge amount".

Ms Bowes recommends that nobody should keep more than 10 to 15 per cent of their investment portfolio in cash: "The trouble with keeping all your money in cash is that if you need it to provide an income, your capital will be reducing in value."

If you haven't got any savings, your priority should be to build up a cash buffer for emergencies. Don't put all your money in equities: if you need to get your hands on several hundred pounds in a hurry, you could have to sell shares just as the market goes down.

Ms Gee stresses the importance of developing a savings habit: "Set up a standing order so a set, affordable sum goes out of your account each month. Do this at the start of the month rather than leaving it to the end or you will just spend what cash you have left over."

A number of tempting deals are now available for savers, but you should choose your account with care. Don't opt for headline-grabbing interest rates unless you are prepared to chase the best offers and keep moving on if your current rate starts to look less competitive. Be aware that bonus rates may only be on offer for a set period.

For example, Egg guarantees to pay new savings customers 0.75 per cent above the Bank of England base rate, giving a current pay rate of 4.75 per cent gross. But existing Egg savers don't qualify for this bonus - they remain on 4 per cent - so they might want to switch to a more competitive deal.

If you aren't likely to want to move account again in six months' time, you should opt for an account that consistently offers an attractive rate of interest.

Savers, and particularly those who are higher-rate taxpayers, shouldn't neglect individual savings accounts. If you haven't already put money in one this tax year, you can invest up to £3,000 tax-free in a mini cash ISA. Make sure the account is instant access: Intelligent Finance pays 4.6 per cent and promises that the rate will stay 0.3 per cent above the base rate until January 2005.

Fixed-rate accounts that tie you in for several years should be given a wide berth.

"Fixed rates might be attractive at the moment but I feel they are not suitable because locking your money up for a period of time is not what cash is all about," advises Ms Gee. "And with interest rates likely to increase further this year, you want to keep your options open."