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If you have a new-fangled hot water heater than has a high in-built R-factor, insulating the thing isn't going to bring your heating costs down by any large amount. (It still might be worth doing for the sake of the environment, the low cost and the ease of insulation.) On the other hand, if you have no idea when your hot water heater was built or if you are renting a house with a heater of a dubious nature, then you probably should insulate your hot water heater. It can reduce heat loss by up to 45% and bring down water heating costs by 4%-9%.

How to Insulate a Hot Water Heater

Source: EERE.

1. Start with the top. Cut out insulation to fit over the top of the water heater. You will have to cut holes into it for the pipes to poke through. Let it fall over the sides. Tape the insulation to the sides.

2. Wrap the insulation around the tank. Do not let the two sides meet over the access panel.

3. Use the belts to affix the insulation to the sides of the tank. Don't pull the belts too snugly. They should only compress about 1/5 of the insulation's thickness.

4. Cut away or make adjustments so that the pressure relief valve and the overflow spout are accessible.

5. Cut an X over the access panel. The X should create four triangular flaps. Push those under the insulation.

- NOTE: Don't set the water heater over 130 degrees. It can overheat.

Don't try and insulate a leaky tank. Replace or repair if possible.