The Surprising Way to Earn More Interest on Your Savings
Apr 6th 2013 10:02AM
Updated Aug 8th 2013 11:49AM
If you have a savings account, you know how low interest rates have gotten lately. It's hard to get much income from your savings without taking drastic measures like investing it in the stock market.
But there's one way you can boost your income on your savings without taking any risk at all. You'll find that solution in an unexpected place: simple savings bonds.
How savings bonds will pay you more
If you thought the savings bond that your grandparents gave you when you were born was the last one the U.S. Treasury ever issued, you're not alone. But certain savings bonds remain a smart savings option, especially given the low rates available elsewhere. In particular, Series I savings bonds, whose returns are linked to inflation, offered rates that knock the socks off similar alternatives -- and they offer extra benefits that those alternatives don't.
Right now, I bonds pay a rate of 1.76%. You have to hold the bond for a minimum of one year, and if you cash them in before five years pass, you have to pay a penalty of three months' interest. Rates change every six months based on the rate of inflation. For instance, the previous rate on I bonds was 2.20%.
But even with those terms, compare I bond rates with what you can get elsewhere:
- Among the top one-year bank CDs, only a few manage to top the 1% mark. General Electric's GE Capital division offers 1.05% right now, but the average rate nationally is just 0.26%.
- If you lock up your savings for five years in a bank CD, the best rates are still solidly below 2%. AIG's banking division pays only 0.65% on a five-year CD.
- Even if you're willing to give up FDIC insurance protection, offerings like Ford's Interest Advantage and Caterpillar's PowerInvestment notes still don't match up. Ford pays a bit above 1% right now, while Caterpillar is slightly lower.
Those companies pay such low rates because they mostly don't need capital from outside sources right now. With access to credit markets so easy and cheap, paying up for ordinary savers doesn't make business sense.
Other advantages of savings bonds
Another great benefit of savings bonds is that you don't have to pay taxes on the interest until you cash in the bond. Compared with regular CDs and savings accounts, that feature can let you defer between $10 and $40 in potential tax liability for every $100 in interest you get. If you later use the proceeds for educational purposes, that interest becomes tax-free for many taxpayers.
I bonds' floating rates do introduce some uncertainty into the savings decision. But with their flexibility, they may be your best savings option even if you do end up needing to take out money sooner rather than later.
Learn more about savings bonds at the Treasury's website.
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The article The Surprising Way to Earn More Interest on Your Savings originally appeared on Fool.com.Fool contributor Dan Caplinger owns warrants on AIG. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends AIG and Ford, owns shares of AIG, Ford, and General Electric, and has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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