This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Thursday, April 24, 2008

Savings Bonds and CD's starting to look good.

Posted By Paul

So has anyone else out there noticed that the interest rates for internet savings accounts have fallen to the point where it's harder and harder to get excited about them?

In fact my experimental investments such as my savings bonds and my CD ladders are starting to look really good (or at least better than my basic savings accounts). By locking in rates for the CD's and the savings bonds the somewhat blah rates of 2007 are beating the current rates on my savings account.

In fact Matt's wife forwarded this article to me on Clark Howard:

Buy Series I Bonds Before April Ends.

The article puzzled me a little bit since it says:

"Beginning in October, the rate will bump up to 6.06% for the following 6 months. That's a very competitive rate."

That struck me as odd. If you read my post on savings bonds you'll see that the I Bond rate is a mix of a fixed rate and an inflation rate. I don't see how you could predict the future rate of the bonds unless you knew both numbers in advance.

If you read the comments on the article you'll see a lot of discussion on the merits of this article, but the point I wanted to get across is that I learned something very useful and that is:

The argument that you shouldn't invest in CD's or savings bonds or other 'locked in rate' investments today solely because you can get the same rate with a savings account without having to lock your money away ASSUMES that the savings account rates of tomorrow will either be higher or the same as they are today.

For example, some of my emergency fund is in CD's that are locked in at 4.9% and even if I factor in the penalty of cashing the CD out early they're making a better return than my savings account.

So what does this mean? I guess it means that I'm going to watch the savings bonds rates very closely and maybe get some more if the fixed rate ever gets up to a nice amount. In addition, the next time that CD rates get up to a nice level I'll consider locking in again to take advantage of that (and now that I've seen it in action I totally get the idea behind the CD ladder).


Matt said...

Let me know the next time you see good CD rates. I'm considering branching out a bit, and those seem like a nice option.

Savings Bond Calculator said...

Wonderful post! loved reading it. Whatever said and done I think the safest way to invest is saving in saving bonds because they are at least low risk.

Paul said...

Thanks for the kind words! If you're willing to give up (potential) higher returns in favor of low risk, then savings bonds are definitely an option. The new series I bonds come out in November, I'm eager to see what they end up being.