Savings Accounts, Term Deposits and Bonds: Safer Places for Your Money
Safer ways to hold money: savings accounts, term deposits and government bonds. How they differ, what deposit protection means and why inflation matters.
In short: for a reserve and for money you will soon need, safer products suit: a savings account, a term deposit or government bonds. They offer a lower but more predictable return than stocks. Interest rates change, so always compare current offers. For long-term goals safe products alone are often not enough, because inflation erodes their return.
Why safer products
Stocks fluctuate in the short term and can lose money. Money for an emergency fund, a holiday or a car in a few years therefore belongs in more stable products. The mix of safe and risky parts is covered in Where to invest $500 a month.
Savings account
- Advantage: your money is available any time, and the deposit is usually protected.
- Disadvantage: the rate changes, often falls, and a headline rate may depend on conditions (minimum balance, a bonus for a limited time).
- Who it is for: an emergency fund of 3 to 6 months of expenses.
Term deposit
- Advantage: a fixed rate for an agreed period.
- Disadvantage: the money is tied up, and withdrawing early usually costs you interest.
- Who it is for: money you will not need before a certain date.
Deposit protection
Bank deposits are covered by a national guarantee scheme up to a limit. In the EU the standard limit is €100,000 per client per bank, and in the US the FDIC covers up to $250,000 per depositor, per bank and ownership category. Limits and rules differ elsewhere, so check the current terms for your country.
Bonds
A bond is a loan to an issuer (a government or a company) that pays interest and is repaid at the end.
- Government bonds. Generally the least risky; returns tend to be lower.
- Corporate bonds. The return is usually higher, but the issuer may fail to repay. Risk varies widely, so check it carefully.
- Bond ETFs. They diversify across many issuers, but their price moves with interest rates. Widely held examples include AGG and BND in the US. See What is an ETF.
Comparison
| Savings account | Term deposit | Bonds | |
|---|---|---|---|
| Access to money | high | tied up | depends on the type |
| Risk | low | low | from low to high |
| Return | variable | fixed | by issuer |
Inflation and return
If the interest is lower than inflation, your money loses value in real terms. That is why it makes sense to keep the safe part at a sensible size and invest the rest for the long term. See Inflation and investing and How compound interest works.
Frequently asked questions
How much should I keep in a savings account?
Usually a reserve of 3 to 6 months of expenses, more if your income is irregular. Consider investing money above the reserve according to your goal.
Are bonds safer than stocks?
They generally swing less, but they are not risk-free. Corporate bonds and bond funds can lose money.
Which is better, a savings account or an ETF?
They serve different goals: a savings account for short-term money, an ETF for long-term investing. See How to start investing.
For information only, not investment advice. Interest rates and terms change, so verify the current offer with the provider.
