Advantages & Disadvantages of Investing in a Savings Account or U.S. Savings Bond

When many people are struggling to pay off debt, anytime you think about savings, you’re at an advantage. A savings account can get you through an emergency without your needing to go in debt. And if you start saving while you’re young, you take advantage of compound interest – interest that is calculated on principal plus accrued interest.

Savings accounts and U.S. savings bonds provide two ways to save money. There are advantages and disadvantages to both.

Money you invest in a savings account through most banks and credit unions is risk-free up to $250,000 per person per account if the Federal Deposit Insurance Corp. or the National Credit Union Administration insures the financial institution. The money you put in a savings account is liquid; you can withdraw it anytime. There is typically no minimum deposit with a savings account; you can usually open one with as little as $1.

Always check whether there is a minimum fee. Some institutions might charge if your balance falls below a certain amount.

Savings accounts typically offer a lower interest rate than other investment vehicles. When interest rates are low, the yield you get on interest probably won’t keep up with inflation. This decreases your buying power.

Some money market accounts might offer a higher interest rate than a regular savings account, but money market accounts have certain restrictions. They typically require a larger minimum balance than a regular savings account, and you’re generally limited in how many checks you can write from the account and how many transfers you can make per month.

Also, some online savings accounts offer higher interest rates, but you would need to do all of your banking online.

U.S. savings bonds are generally a safe investment because the U.S. government backs them. They’re easy to buy; you don’t need a broker’s help. You don’t pay state or local taxes on the interest you receive on them, and you don’t need to pay federal tax on interest you receive until you cash in the bonds. You also can receive tax benefits if you use the bonds for education.

You can buy savings bonds for as little as $25. The interest-earning period on savings bonds is 30 years. Saving bonds are now available only online, but the interest is automatically deposited to an account of your choosing.

U.S. savings bonds are not liquid; you need to hold them for one year. And if you don’t hold them for five years, you lose three full months of interest. You are limited to buying $10,000 worth of savings bonds in one calendar year.

You probably won’t get rich investing in savings bonds because the returns are typically low.