The Federal Reserve has rapidly raised benchmark interest rates recently, and this has caused the interest rates paid by high-yield savings accounts to rise to levels not seen in quite some time. In addition, the reason for the Fed's rate hikes -- inflation -- has remained at elevated levels, and that has made inflation-protected savings bonds (I bonds) far more attractive.
Both savings accounts and I bonds are essentially risk-free places to put your money, and both are paying elevated yields right now. But which is the better choice for your money? Here's a look at the pros and cons of each to help you decide.
Reasons I bonds could be a better choice
Series I Savings Bonds, or I bonds, are specifically designed to protect your money from the effects of inflation. Savings accounts are not -- they simply pay interest based on prevailing rates.
And these rates can be very different. For example, in mid-2022, I bonds paid 9.63% interest because that's what the inflation rate was. But at that time, most high-yield savings accounts were paying one-third of that interest rate, as benchmark interest rates hadn't quite caught up yet. To be clear, for much of recent history, savings accounts have not kept up with inflation. It wasn't too long ago where it was difficult to find a yield greater than 1.5% or so from a high-yield savings account. But now you can expect to find banks offering savings accounts with 4% APY or higher.
On a similar note, I bond interest rates are less likely to disappear entirely. New I bonds issued as of this writing have a 0.9% fixed rate component plus the inflation adjustment. The Fed's target inflation rate is 2% over the long run, so even if the central bank is successful at controlling inflation, I bonds could still have a substantial yield.
Reasons a high-yield savings account could be better
The biggest arguments in favor of savings accounts mainly have to do with the drawbacks of buying I bonds.
For one thing, I bonds cannot be redeemed at all for the first year, and there's a penalty for redeeming them within five years. They are designed as long-term inflation protection vehicles. On the other hand, money can be withdrawn from a savings account whenever you want.
In addition, there's a limit to how much you can put in I bonds. Currently, you can buy as much as $10,000 worth of I bonds every year. So, if you have, say, $50,000 in savings, you literally can't choose I bonds for all of it.
Finally, you may be able to get a better yield from savings accounts. The current I bond interest rate is 4.3% for those sold through the end of October, and this rate is guaranteed for the first six months. Meanwhile, some of the high-yield savings accounts we follow currently have APYs of 4.5% or more.
Which is best for you?
Like with most financial products, there's no one-size-fits-all answer to which is the better choice. It depends on your personal goals and how long you're willing to commit to leaving your money alone.
Finally, it's also important to keep in mind that it isn't necessarily a choice between the two of them. There's nothing wrong with maintaining a high-yield savings account with money you might need for unexpected expenses, especially while rates are high, and putting some money you're certain you won't need for at least a few years into I bonds to protect yourself from inflation.
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FAQs
Higher rate of return: Currently, the combined rate of I bonds is set at 5.27%, which is significantly higher than the average return you'd find with a traditional savings account, money market account , or certificate of deposit (CD).
Should I keep money in savings or bonds? ›
It's an important question to ask if you're trying to grow wealth. Investing can offer the potential for higher returns, but it can also mean taking more risks. Saving money tends to be safer, though it may limit growth. If you're looking for an investment that's also safe, you might consider bonds.
What is the downside to I bonds? ›
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Do bonds earn more interest than a savings account? ›
Reasons I bonds could be a better choice
For example, in mid-2022, I bonds paid 9.63% interest because that's what the inflation rate was. But at that time, most high-yield savings accounts were paying one-third of that interest rate, as benchmark interest rates hadn't quite caught up yet.
Why bonds over savings accounts? ›
Sitting in cash also presents an opportunity cost as it forgoes potentially better investments. Bonds provide interest income that often meets or exceeds the rate of inflation, and with the potential for capital gains if bought at a discount.
How much is a $100 savings bond worth after 20 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds.
Which savings account will earn you the most money? ›
Best Savings Accounts
- Evergreen Bank Group – 5.25% APY.
- CFG Bank – 5.25% APY.
- Upgrade – 5.21% APY.
- EverBank – 5.15% APY.
- RBMAX – 5.15% APY.
- Bread Savings – 5.15% APY.
- Popular Direct – 5.15% APY.
- Western State Bank – 5.15% APY.
While Treasurys boast higher rates than CDs, you can still score a generous annual percentage yield (APY) on a CD by shopping around. Typically, online banks offer higher interest rates than brick-and-mortar ones. Some of the best CDs have APYs that top 5%.
Can you ever lose money on an I bond? ›
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline. Question: What is the inflation rate? November 1 of each year. For example, the earnings rate announced on May 1 reflects an inflation rate from the previous October through March.
“With I bonds, your principal is protected and safe. However, if you cash the bond out before five years, then you will lose up to the last three months of accrued interest.
Why are series I bonds not good? ›
Further, I-bonds must be held for at least a year, so you won't be able to cash them out before a year is up if the rate plunges due to falling inflation. In fact, you'll lose the last three months of interest if you redeem them before five years are up.
Which is better, treasury bills or bonds? ›
Both Treasury bonds and Treasury bills are low-risk debt securities issued by the federal government. T-bonds are designed for long-term investing, while T-bills have much shorter maturity periods. Both can help diversify your investment portfolio while shielding you from state and local taxes.
Why would someone invest in stocks or bonds rather than a savings account? ›
The biggest difference between saving and investing is the level of risk taken. Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.
How much is a $500 savings bond worth? ›
| Total Price | Total Value | YTD Interest |
|---|
| $500.00 | $2,127.80 | $50.40 |
Dividend stocks can offer you a payout and the potential for appreciation over time, making them a more attractive long-term investment than Series I bonds. However, they come with more volatility and without a government guarantee that you'll get your principal back.
Is there anything better than I bonds? ›
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the increased amount. If the principal is equal to or lower than the original amount, you get the original amount.
What are the disadvantages of TreasuryDirect? ›
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
Are bonds safe if the market crashes? ›
Yes, you can lose money investing in bonds if the bond issuer defaults on the loan or if you sell the bond for less than you bought it for. Are bonds safe if the market crashes? Even if the stock market crashes, you aren't likely to see your bond investments take large hits.
