Regular Savings: The way to lay your nest egg

When it comes to paying for big expenses in life, such as a home or a once-in-a-lifetime holiday, most of us borrow and pay back later, or dip into our savings.

Creating a large enough sum to pay for such major outlays requires time and discipline. But with the right planning, many of the things we want can become a reality.

The first priority in saving should be to amass an emergency fund. Most experts recommend this should be enough to cover living expenses for at least three months. After this you may want to start looking at saving over the medium term - typically three to five years - to build a pot of money to pay for big expenses.

Over the medium term you could create a tidy sum for a nest egg or to help pay for your children's education or college years. It may be that you have started a family, in which case you may want to start saving now so that in five years you can afford to buy a larger home or car.

There are many schemes where you can save a regular amount. You can put money into the accounts offered by banks, building societies and National Savings and you can also invest in the stock market.

Banks and building societies offer a range of accounts. While the interest rates may not be inspiring, there is no risk. Typically rates are tiered, so the more money you put into your account, the higher the rate. Also, the more notice you are prepared to give before withdrawing money, the better the rate you can expect. Instant access accounts pay lower rates than those requiring 30, 60 or 90 days' notice.

The best-paying deposit accounts tend to be ones in which you deposit money at regular intervals. Some banks and building societies offer enhanced rates as long as you agree to save regularly over, say, three years and do not make withdrawals. Among those offering these higher interest accounts are the Bradford & Bingley, Bristol & West, Coventry and Scarborough building societies.

Other deposit accounts that attract good rates are high interest cheque accounts. These have the advantage of coming with a cheque book but they often require a minimum balance of pounds 2,500. Also worth considering is a National Savings Investment Account. The minimum opening balance is pounds 20 and savings attract a competitive interest rate of 4.75 per cent rising to 5.25 per cent when the balance reaches pounds 500. The account requires 30 days' notice if you want a withdrawal.

One of the most popular risk-free savings schemes is the Tax-Exempt Special Savings Account (Tessa). Most banks and building societies offer Tessas, and rates vary, so it is essential to shop around. The best rates are often paid by less well known banks or building societies.

The attraction of a Tessa is that all interest earned is tax-free as long as you keep the account for five years. Some Tessas require a minimum opening balance but most do not. Interest paid on Tessas can be fixed for their five-year term or the rate can be variable. When interest rates are high it is a good idea to lock into a high fixed rate, but when interest rates are low, as now, it is often better to opt for a variable rate.

You can invest up to pounds 3,000 in a Tessa in the first year and up to pounds 1,800 in the four following years to a maximum of pounds 9,000. If you are planning to save regularly for five years these accounts will almost certainly be the best risk-free investment around. If, however, you are prepared to take a little risk and invest in the stock market, you may well achieve better returns.

The best way for regular savers to invest in the stock market is through a collective investment where money is pooled with other small investors' money and used to buy a range of shares. Unit trust funds and investment trust funds do this.

There are hundreds of unit trust and investment trust funds and many offer entry into the trusts through a regular savings scheme. You often can invest as little as pounds 25 a month.

The types of shares in which the funds invest differ and this will be reflected in their "risk profile". For example, a fund that invests in small new companies may be more risky than a fund that invests in large established firms, but it also offers the possibility of greater rewards.

Investment trusts and unit trust savings schemes all make charges - usually an initial charge and an annual management fee. The best way to invest in a unit trust or investment trust is by a personal equity plan (PEP). A PEP ensures that all the dividends and gains are paid to you free of tax.