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The Difference Between Investing in Bonds vs. Savings Accounts

Original post by Rose Johnson of Demand Media

Individuals close to retirement age tend to invest in bonds above risker assets.

When you consider places to put you money, many investment options exist. Two of the most common investment options are bonds and savings accounts. Both investment types offer interest on money invested, but the two financial products are vastly different. People place their money in savings accounts if they plan to use it in the near future. Individuals invest in bonds to diversify their portfolios, earn interest payments and plan for retirement.

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Investing in Bonds

Bonds are considered intermediate to long-term investments. Government agencies and corporations issue bonds to raise funds for their business operations. Bonds are considered loans because agencies and corporations pay investors back the initial amount they invested plus fixed interest payments for the life of the bond. Bonds are typically thought of as safer investments than stocks, but bond investing still contains risks. Interest rates are the primary factors that affect the value of a bond. As interest rates increase, the value of a bond decreases. As interest rates decrease, the value of a bond increases. Bonds offer regular interest payments to investors, which is typically higher than the interest earned on savings accounts. Investors can also receive tax advantages by investing in certain types of bonds.

Types of Bonds

Investors can choose from several types of bonds, including corporate bonds, United States government bonds and municipal bonds. Each bond type offers unique features, returns and risks. Corporate bonds are issued by Securities and Exchange Commission-registered corporations. The main bonds issued by the U.S. government are treasury bills, treasury notes and treasury bonds. Bonds issued by the federal government are considered risk-free because they are backed by the full faith and credit of the U.S. government. Municipal bonds are issued by state and local governments. Municipal bonds allow investors to earn interest payments without the obligation of paying taxes on the payments.

Basics of Savings Accounts

One of the easiest ways to invest your money is to open and contribute to a savings account with a financial institution. The money you place in a savings account is protected by the FDIC up to $250,000 per account owner. The requirements for starting a savings account vary per institution, but most require small financial contributions to open and maintain the account. In contrast to some bonds, you can retrieve your money out of your savings account quickly by contacting your financial institution and withdrawing money. Money market and high-yield savings accounts usually pay higher interest rates than regular savings accounts.

Use of Savings Accounts

Many people place their money in savings accounts rather than bonds if they need the money in the near future. Placing your money in a savings account allows you to establish an emergency fund to use in critical times. As a short-term investment option, you should consider how easily accessible your money is to you. If you travel often, a national bank may serve you better because you of its many locations. You should also consider the interest you earn, the fees charged by the financial institution and the institution's customer service.


                   

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About the Author

Rose Johnson started her writing career in 2008. She has written articles for several online publications, specializing in business and personal finance. Johnson holds a Bachelor of Business Administration with a concentration in accounting from Texas Southern University.

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