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Savings-Bonds-Alert: Savings Bonds vs. the Money Market

Thursday, September 09, 2004

Savings Bonds vs. the Money Market

Assuming that I have $50,000 in a money market that is earning 1.54%, would it be advisable to pull it out and buy Savings Bonds with that money? Tom's response The primary advantage of a Money Market account is that the money is instantly available to you. The primary disadvantage is that the rate is so low. In terms of safety (the risk that you won't get your money back) Savings Bonds (guaranteed by the U.S. Treasury) are a tiny bit safer than bank Money Market Accounts (guaranteed by the FDIC), which are a little bit safer than non-bank Money Market Mutual Funds (not guaranteed by anyone, but generally considered very safe). The primary disadvantage of Savings Bonds is that you can't get your money out for one year after purchase. Between years one and five there's a penalty of three months interest if you take your money out - however, the rates are so much higher that you can pay the penalty and come out ahead of Money Market funds and even 1- and 2-year bank Certificates of Deposit. So it basically depends on how soon you might need the money. With Savings Bonds there's also a limit of $30,000 per year per series, so if you go with Savings Bonds you'll have to split your money between Series I, which features inflation protection, and Series EE, which features market-based rates. If you go with Savings Bonds, you might also consider investing electronically at TreasuryDirect rather than messing around with paper Savings Bonds.


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