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Bond vs. Savings Account

Savings Account:

                Savings account is a financial account held at a bank or a financial institution that provides modest interest rate. These accounts are for the money that you don’t intend to use every day. Rather, these accounts are used to store money for long-term financial goals like buying a car or a house. This account has limited financial independence depending on the type of the account, the account holder may not be able to write checks from the account and the number of free transactions is limited. Savings account funds are considered as one of the most liquid investments outside of demand accounts and cash.

Bond:

                Bond is a debt investment in which an investor loans to an entity which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities and even governments to raise money and finance various projects. When companies need to raise money to finance new projects or to maintain the ongoing operations they may issue bonds directly to investors instead of getting loans from banks. The company issues the bond with stated interest rate that will be aid and the time at which the loaned funds must be returned.

The Similarity:

                Bonds and savings accounts are fundamentally distinct but the share some similarities especially when it comes to keeping your money safe and secure. When an investor deposits money to a savings account, the investor is essentially loaning money to the bank and the bank pays interest to the investor. On the other hand, an investor who buys bonds issued by a company or government is loaning money to the issuer in exchange for interest. When the bond reaches its maturity date, the investor receives back his original money just as he would withdraw the cash from his savings account.

The following text compares different financial aspects associated to using bonds and savings accounts

Long Term Saving:

                If you have a large amount of money to save for a long period of time, bank accounts are a more attractive option. Certificate of deposits offer considerably higher interest rates for your agreement to leave your money in place for a set time. But for a long term saving plan, inflation is likely to become a factor. Moreover, inflation indexed bonds may not offer particularly high rates of return.

Tax Treatment:

                The interest on bank deposits is taxable as is the interest on most bonds. However, the bonds issued by cities, states or governments are tax-free. While these bonds won’t pay you as much interest as a corporate bond but the tax saving can make them a sound investment.

Security:

                Bank deposits are insured which means that your money is secured. Even if the bank goes under, you will get back your money. On the other hand if you buy bonds, your ability to get your money back is based on strength of the organization that issues the bond. If bonds are issued by the state, they are backed with full faith and credit of the government. Bond prices can also vary significantly, they can go up if the company that issues them becomes stronger or interest rates in the economy drop. However, the price may also drop if the reverse happens. This means that you can sell the bond more than you paid for it.

Interest Rates:

                Banks offer savings interest rates as low as 0.01 percent, while online banks offer about 1 percent. However, long term bonds like 10-year treasury bonds has a yield of about 1.8 percent.

One of the biggest differences is that the investors have an option of selling their bond to other investors before these bonds reach their maturity date. This option is not available for people who invest in savings accounts.

Knowing the pros and cons of both these investment options you must choose what is best for you based upon the amount of money, time for which you can keep the money in place, interest rates and your long term financial plan. Your desired financial independence and flexibility is also a major factor when choosing between the two options available.