Treasuries vs. Bonds vs. Savings Accounts: What’s the Difference?
Compared with the stock market, savings accounts, bonds, and treasuries are all often considered safer ways to store or grow your money. But how do they work, and how are they different?
You probably know by now that a savings account is a secure place to store your money. However, you may not realize that bonds and treasuries are also safe. I say safe, but bear in mind that none of them are truly, 100 percent protected from decreasing in value in the worst-case scenario. There is always risk of some sort.
First off, nothing in this article should be taken as investment advice. If you’re ready to put your money somewhere, consult your financial adviser to determine what is best for you. Now that we have that out of the way, here’s what you need to know about savings accounts, bonds, and treasuries if you’re trying to maximize the return on your money while keeping it safe.
What Is a Savings Account?
Savings accounts are a type of bank or credit union account used to encourage saving. The interest rates on savings accounts are generally higher than on checking accounts, especially if you use an online bank that specializes in higher rates, such as Ally Bank, Marcus by Goldman Sachs, or Synchrony Bank. It’s easy to open an account at a bank or a credit union. Simply fill out a form and deposit your savings.
Savings accounts are mostly limited to six withdrawals per month by federal law (though there are exceptions), and you may have to pay penalties if you exceed that limit. However, as long as you stay below six, you can take your cash out at any time. There is virtually no risk of your money decreasing in value, either. In fact, most banks are FDIC or NCUA insured, which provides protection of up to $250,000 per account. That said, the FDIC and NCUA insurance programs could collapse if under great stress, resulting in a loss of your money, but that is extremely unlikely to happen.
What Is a Bond?
Bonds are essentially loans to companies, governments, and organizations. Bonds usually pay interest; the interest rate depends on the riskiness of the bond. In most cases, when the bond reaches its maturity date, you’ll be repaid the amount you paid for the bond plus interest. That said, there are many types of bonds that work in different ways, so investigate those you may be considering and understand how they work before investing.
Some bonds, like U.S. government–issued bonds, are highly rated and likely to be repaid, so the interest rates they pay are lower. However, other bonds, such as those from risky companies that may not survive, have lower ratings and have to pay much higher interest rates in order to get people to buy them. If the company goes out of business, you may not receive your money back. Unlike savings accounts, you can’t take your money out of a bond whenever you want. Instead, you have to sell your bond to another buyer to access your cash. This is important to note because bonds can have very short terms of a year or less or very long terms, in some cases a century or more.
You’d think you could simply sell your bond for what you paid for it, but that is rarely the case.
If interest rates have gone up since you bought the bond, you’ll have to sell your bond at a discount to get someone to purchase it. If interest rates have gone down since you bought it, you can demand a premium for the higher-interest-rate bond you hold.
You can buy individual bonds from specific organizations, or you can buy groups of bonds through an exchange traded fund (ETF) or a mutual fund. If you sell a bond, an ETF, or a mutual fund that you’ve held for less than a year, you’ll have to pay income tax at the short-term capital gains rates. However, if you hold the security for more than a year, you’ll probably pay the reduced long-term capital gains tax rates. Tax law varies depending on the type of bond you invest in, so make sure to check with a CPA or other tax professional to determine the taxability of your bond.
You can buy bonds from through a traditional broker such as Vanguard, or from one who specializes in bonds. There are even apps, such as Worthy, that allow you to buy bonds.
What Is a Treasury?
Treasuries are specific types of bond issued by the U.S. government. They come in different forms, but are generally considered some of the safest bonds available in terms of default risk. Because the risk is lower with treasuries, you’ll probably receive less interest than with other types of bonds.
Treasuries are often called by different names, depending on the term of the bond. The term of the bond could be as short as four to 52 weeks, as with treasury bills, or as long as 30, as with treasury bonds. Treasury notes are also available in terms from two to 10 years. The interest you receive from treasuries is taxable on the federal level, but tax-free at the state and local levels. You can buy treasuries directly from the government through TreasuryDirect, or in some cases they can be purchased through a broker. You can buy them on the secondary market as well, through a broker such as Fidelity.
In general, most people should stick with a savings account if they need access to the cash. Once you’re financially stable and want to start investing to grow your wealth without taking a chance in the higher-risk stock market, you may want to look into bonds and treasuries.