2. Saving vs. Investing
b. Common savings products
EE Series Savings bonds are issued by the federal government. They can be bought for as little as $25 and never lose this amount. The interest earned doesn’t change and is exempt from state and local income tax. The money is tied up for five years and there is a penalty if you redeem the bonds before that date.
Savings accounts are often the first banking product people use. Most have a relatively low interest rate.
Money-market funds are specialized funds that invest in extremely short-term bonds. These funds usually pay a slightly higher interest rate than a savings account, but often less than a certificate of deposit (CD). Because a money-market fund invests in things that are guaranteed by the U. S. government, it is low risk. Savers who are building up a fund for investment purposes sometimes use money-market funds because they earn a higher return than they would with a basic savings account and they can take their money out at any time without paying a penalty.
Certificates of deposit are often referred to as a “CD.” This is a specialized deposit made at a bank or other financial institution. Savers place their money in the bank for a specified period of time—usually several months or years—and the bank promises to pay a certain rate of return or interest. The money must be left in the CD for the entire specified time or a penalty fee for early withdrawal is charged. The rate of return is usually higher than that paid for a savings account.