Where is the best place for your savings?

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  • If you want to save money, you can consider opening a savings account or a 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 cash.

Savings accounts and savings bonds are two useful tools for earning interest on your money.

If you’re unsure where to put your savings right now, learning more 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 a savings account will likely depend on when you need your money and how you plan to use it.

  • A bond is a low-risk type of investment. With a savings bond, specifically, you are buying US Treasury bonds. Savings bonds are ideal for long-term savings. They can be useful for diversifying an investment portfolio.
  • A savings account provides easy access to your money as it is stored securely in a bank. The interest rate you earn will depend on your bank. But, in general, 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 are generally considered safe, low-risk investments.

The US Treasury has two types of savings bonds – Series I bonds and Series EE bonds. Series I bonds can help fight inflation, while Series EE bonds are promised to double in value if you keep money in a bond for 20 years.

There is no charge for buying a savings bond, but you will need a minimum of $25 to buy one. Each year, you can purchase up to $10,000 of Series I electronic bonds, $5,000 of Series I paper bonds and $10,000 of Series EE bonds.

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

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

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 need the money and how much cash you have. need for 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 of P. Dixon Consulting, LLC, also points out that savings bonds might be ideal for someone pursuing higher education, such as a freshman.

“When they graduate, maybe a savings bond is a great thing to get or give to them as a gift. When they graduate, they’ll have the extra funds and earned interest. It has also matured, and then they can get it without penalty,” says 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 that you will get from a credit union or bank.

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

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

The interest rate you’ll earn on a savings account can also vary greatly depending on the financial institution you choose. According to the FDIC, the average savings account earns 0.13% APY.

Interest earned on a savings account is taxable. However, this will generally not have a significant impact when you pay taxes.

When should you consider a savings account?

A high yield savings account will be the best for the 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’s a great place to store and save your money for things you might need to access funds for over the next 12 months,” Dixon adds.

For example, a high-yield savings account can be a good place to keep an emergency fund. If something unexpected happens, like your car breaks down, you will be able to transfer money to a checking account or withdraw money directly if your account has a bank or debit card .

Garland K. Long