Bonds vs. savings account: The best fit will probably come down to when you'll need the money (2024)

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• If you want to save money, you might consider opening a savings account or savings bond.
• You may prefer savings bonds for long-term savings to earn a higher return.
• Savings accounts offer lower interest rates than bonds but are ideal for emergency money.

Savings accounts and savings bonds are two useful tools to earn some interest on your money.

If you're unsure where to put your savings right now, learning about the differences between these two can help you choose the best place for your money.

Bonds vs. savings account: At a glance

Choosing between a savings bond and savings account will likely come down to when you'll need your money and how you plan to use it.

• A bond is a type of low-risk investment. With a savings bond, specifically, you buy bonds from the US Treasury. Savings bonds are ideal for long-term savings. They may be useful for diversifying an investment portfolio.
• A savings account provides easy access to your money because it's safely stored at a bank. The interest rate you'll earn will depend on where you bank. But, generally, savings accounts have lower returns than bonds because you're saving money instead of investing it.

What is a savings bond?

Savings bonds are sold backed by the US Treasury, so they're generally regarded as safe, low-risk investments.

The US Treasury has two types of savings bonds — Series I bonds and Series EE bonds. Series I bonds may help combat inflation, while it's promised that Series EE bonds will double in value if you keep money in a bond for 20 years.

There aren't any fees for purchasing a savings bond, but you'll need a minimum of $25 to buy one. Each year, you may buy up to $10,000 in electronic Series I bonds, $5,000 in paper Series I bonds, and $10,000 in Series EE bonds.

You must keep money in a savings bond for at least one year, and it can earn interest for up to 30 years. However, keep in mind that if you cash a savings bond during the first five years, you will be charged a penalty of three months of interest.

If you get a savings bond, you will have to pay federal taxes on earned interest, but not state taxes. You can pay them when you file a tax return or wait until you cash out your bond.

When should you consider a savings bond?

If you're trying to decide if a savings bond is right for you, Jeb Jarrell, CFP and owner of Plentiful Wealth, LLC, advises, "It comes down to when you think you might need the money and how much liquidity you need in a short term."

If you don't need access to some of your savings for a few years, Jarell says a Series I bond may be a better option than a savings account because it offers a higher rate of return.

Patrina Dixon,CFEI and owner ofP. Dixon Consulting, LLC, also points out that savings bonds could be ideal for someone pursuing higher education, like a college freshman.

"When they graduate, maybe a savings bond is an ideal thing to get or to give them as a gift. When they graduate, they'll have the funds and some interest earned on top of it. It has also matured, and they can then get that without penalty," explains Dixon.

Savings bonds are also often used to diversify an investment portfolio. It could be a good low-risk investment if you keep your money in a bond and allow it to fully mature.

What is a savings account?

A savings account is a federally insured bank account you'll get at a credit union or bank.

There's a lot of variety when it comes to savings accounts. Fees and features will depend on where you bank.

For example, some banks may require you to open a savings account with a certain amount of money up front and to maintain a minimum balance to waive a monthly service fee.

The interest rate you'll earn on a savings account may also vary greatly depending on the financial institution you choose. According to the FDIC, the average savings account earns 0.46%.

Interest earned on a savings account is taxable. However, it typically won't cause a significant impact when you pay taxes.

When should you consider a savings account?

A high-yield savings account will be best for money you need to access easily and quickly. It offers more liquidity than a savings bond — you can transfer or withdraw money from a savings account at any time. You'll also earn more interest than a traditional savings account.

"It is a great place to store and save your money for things that you may need to access funds for in the next 12 months," adds Dixon.

For example, a high-yield savings account may be a good place to keep an emergency fund. If something unexpected happens, like your car breaking down, you'll be able to transfer money into a checking account or directly withdraw money if your account has an ATM card or debit card.