Get fibreglass insulation
First of all you need to buy fibreglass insulation.
Note that you need to take the dimensions of your outdoor water heater so you don’t purchase the insulation less. This will also save money as you will buy the exact amount required and there won’t be any wastage.
You also need to buy duct tape in case it is not available in your house.
Cut the fibreglass insulation into vertical pieces
Next you need to slice the fibreglass insulation into strips. Then you need to put it around the water heater. Remember to place them horizontally over your outdoor water heater.
Cut out holes
Next you need to cut out holes or pieces where switch and other control buttons are places. This will help you to easily access them.
Tape a cap of fibreglass insulation on top
Then you need to cut out a cap of the fibreglass insulation. Place it on top of the water heater. Use the duct tape to join it on the top.
Leave space in the insulation
Leave two slits if your water heater is electric. If your water heater works with gas, leave two inches of area open around the flue collar.
Tape unsealed area
You need to cover any area of the water heater which is left uncovered with the fibreglass insulation.
Set the water heater around 120 and 130 degrees
You need to set thermostat of the water heater between 120 to 130 degrees.
In case the thermostat is set higher than this temperature then you may set fire in your wires.
Place rigid insulation underneath the water heater
Much of heat loss occurs through the bottom of the water heater. You can place a piece of insulation under your water heater in order to prevent heat loss.