Savings Accounts vs Bonds Compared

What Is a Bond?

Types of Bonds

• Corporate bonds These are issued by all different types of companies. They tend to be higher risk than government-backed bonds and, as a result, generally offer a higher rate of return.
• Municipal bonds These are issued by cities and other local governments. They typically have lower interest rates than corporate bonds. However, the interest you earn on municipal bonds is often tax free. Municipal bonds are considered slightly higher risk than bonds issued by the federal government, since cities do sometimes default on their debt. 
• U.S. Treasury bonds. These are issued by the federal government and are considered among the safest investments in the world, as they are backed by the full faith and credit of the U.S. government. Because they are considered to have low default risk, they generally offer lower yields relative to other bonds. 
• Savings bonds Savings bonds are also issued by the Treasury Department. There are two types available for purchase —  series EE and series I savings bonds — on the U.S. treasury’s website, and they are issued in low-enough amounts to make them affordable for individuals. 

How Do Bonds Work? 

Pros and Cons of Bonds

Pros

• May earn a higher return than a savings account Bonds tend to offer returns that are higher than the average interest rate on savings accounts. 
• Relatively safe Bond issuers promise to pay buyers back. While you aren’t guaranteed to get your money back with interest, it’s likely that you will, especially if the bond is backed by the U.S. government.
• Rated based on risk level Bond issuers have credit ratings. This helps investors know exactly how much risk they will be taking on when purchasing a bond. Riskier bonds generally offer higher interest rates.

Cons

• Risk of default There is always the risk that a bond issuer will default. This doesn’t mean that you’ll lose your entire principal, but it may mean you only get a portion of it back. That’s why it’s important to check bond ratings before you buy. Highly rated bonds are less likely to default. 
• Low liquidity Unlike the money in a savings account, you can’t easily access the money you put in a bond. In some cases, you can’t access your investment until the bond reaches maturity, which could be 10-plus years down the road.
• High barrier to entry Outside of savings bonds, buying bonds generally isn’t cheap. Many bonds are sold in increments of $1,000.

Pros and Cons of Savings Accounts

Pros 

• Safety Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank, so you can’t lose your money (up to the insured limit) even if the bank goes belly up. Savings accounts at credit unions are similarly insured by the National Credit Union Administration (NCUA)
• Interest-bearing Banks offer interest on the money you deposit in a savings account, expressed as an annual percentage yield (APY), which can help your money grow over time.
• Funds are easily accessible Unlike bonds, you don’t have to leave your money untouched for a certain period of time. When you’re ready to spend your savings, you can easily access your funds. 

Cons

• Relatively low interest rates Because savings accounts are so safe and you can ask for your money back any time, the rate tends to be low.
• Monthly withdrawal limits While savings accounts are liquid, they typically come with some restrictions. Many banks will impose a fee if you exceed six withdrawals per month.
• Interest is usually taxable Also, unlike some types of bonds (and tax-advantaged savings vehicles), the interest you earn on a savings account is generally taxable.

Savings Accounts vs Bonds Compared

Who Does a Savings Bond Make Sense for?

Using a Mixture of Savings Vehicles

The Takeaway