Most American homes use tank style water heaters. These water heaters hold many gallons of water and cycle on and off to continually heat the water. By reducing heat loss from the tank, you can reduce the cost to heat water by as much as 9% (according to the U.S. Dept of Energy).
Newer water heaters have begun adding effective levels of insulation and may not benefit from additional insulation. One way to tell whether you can save money by insulating your water heater is to simply touch it. If the water heater feels warm, it is wasting energy through heat loss.
Insulating blankets are available for about $20 at home centers everywhere. You might even be able to get one free from your local utility department.
Installation will take about half an hour and is fairly easy to do. The most difficult part may be access depending upon where your water heater is located. Blankets may be precut to slip over the water heater or they may wrap around the tank and fasten with tape.
You can insulate both electric water heaters as well as gas or oil-fire water heaters, but special care must be taken with the latter. Do not install insulation near the burner flame, or interfere with air flow to the burner or to the flue on top. In all cases, do not insulate over the thermostat, drain valve or pressure relief valve. When insulating an electric water heater, do not set the thermostat over 130° (F), to reduce the risk of overheating the water heater's wiring. Please carefully follow the instructions that come with the insulating blanket you purchase.