With inflation hovering around 3.5%, it can cost you money to leave your money in a regular savings account; the average interest on a savings account is only 0.46%. That means the interest you earn on your savings account may not keep pace with inflation.
To maximize your returns, investing your money in a Series I savings bond, better known as an I bond, or a (HYSA), can be a smart alternative. Both products offer higher returns than , but there are some important differences to consider before deciding where to invest your money.
What are my bonds?
Series I Bonds are available through the , backed by the full faith and credit of the U.S. Government.
The appeal of I-bonds lies in their dual approach to interest: I-bonds earn both a fixed interest rate and a variable interest rate. The fixed interest rate remains the same throughout the life of the bond. The variable rate is linked to inflation and changes twice a year to coincide with changes in the consumer price index for all urban consumers () – a measure economists use to calculate the change in prices that consumers price for common goods and services.
What does that mean to you? You earn a guaranteed interest rate on the fixed interest portion of the I-bond, but you also earn the variable interest rate. Because I-bonds can change with market conditions, they can provide a useful hedge against inflation.
For bonds issued between November 2023 and April 2024, the combined interest rate – the I-bond interest rate calculated on the basis of the fixed and variable interest rates – is 5.27%.
I bonds earn interest for 30 years. Interest is earned monthly, but is added to the principal every six months. Once you have held the bond for at least twelve months, you can redeem it. However, if you redeem I-bonds before holding them for at least five years, you will sacrifice three months of interest.
Plus points
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Guaranteed return: Because I-bonds have a fixed interest component, you have a guaranteed return on your money. Currently the fixed interest portion is 1.30%.
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Higher efficiency: Currently, the combined interest rate on I Bonds is set at 5.27%, which is significantly higher than the average yield you would find on a traditional savings account, or (CD).
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Exempt from state or local taxes: Although Series I bonds are subject to federal income taxes, they are exempt from state or local taxes, which can save you money.
Cons
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Maximum limits apply: You can use your tax refund to purchase up to $10,000 of electronic I-bonds and another $5,000 of paper I-bonds, for a combined maximum of $15,000 per year. If you are trying to save a larger amount, you will have to find another tool for the excess amount.
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Must be kept for one year: I-bonds cannot be redeemed or redeemed until you have held them for at least twelve months. If you have an emergency expense within the first year of owning an I-bond, you won’t be able to tap your bonds to cover the costs.
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Some withdrawals will result in loss of interest: Although you can redeem an I-bond after twelve months, paying it off within the first five years of purchase will result in you losing three months of interest.
What are high-yield savings accounts?
Traditional savings accounts are tools to save for emergencies or other financial purposes. However, traditional savings accounts have low APYs, so a HYSA can be a valuable alternative.
Often available from or , HYSAs offer significantly higher than average rates; we analyzed the rates of savings accounts offered by 15 credit unions and banks and found that these accounts offered an average annual yield (APY) of 4.31%.
Savings accounts allow you to quickly and easily transfer money to or investment accounts, and there are no penalties for withdrawing money before a certain period has passed.
However, that rate is variable and can change at any time, so there is no guarantee of future returns.
Plus points
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Liquid: With a savings account, you don’t have to leave your money untouched for months. You can transfer or withdraw money without losing the accrued interest.
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Higher than average rates: HYSAs offer significantly higher APYs than other deposit accounts, including traditional savings accounts, CDs or money market accounts.
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Low deposit minimums: Many HYSAs have no minimum deposit requirement, so you can open an account with $0.
Cons
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Possible monthly costs: Some HYSAs charge monthly fees that can only be waived if you meet certain requirements, such as maintaining a minimum balance or receiving direct deposits.
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Rates subject to change: Rates on HYSAs are variable and banks or credit unions can change rates at any time.
I-Bonds vs. HYSAs: Key Differences
Series I bonds and HYSAs can be useful tools to combat inflation. When deciding which option is best for you, consider these important factors:
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Initial investment: HYSAs typically require €0 to open an account, while an I bond requires a minimum of €25.
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Maximum limits: There is no maximum on the amount you can pay into a HYSA (although only with insurance). In contrast, there is an annual maximum of $10,000 in digital I-bonds and $5,000 in paper I-bonds when purchased with your tax refund.
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Compound: With HYSAs, Interest is typically compounded daily and added to your account monthly. With I bonds, interest is earned monthly and is added to the principal value of the bond twice a year.
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Cost: I-bonds have no monthly fees. Although there are free savings accounts, some HYSAs do charge monthly fees.
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Prices: The rate of a HYSA may change as market conditions fluctuate. I-bonds have a fixed interest rate and an interest rate that is linked to inflation, so they offer more security.
I have a bond versus a savings account: which is better?
Which type of account makes the most sense depends on your goals and the intended use of your money. HYSAs provide quick and easy access to your money and offer significantly higher than average rates. However, these rates may decrease over time. I-bonds may be a better option for those who want the combination of guaranteed returns and a variable interest rate that moves with inflation.
