With interest rates rising in response to surging inflation and ongoing market volatility, it can feel like an uncertain time to borrow and invest money. But there is an upside for savers: returns on low-risk savings vehicles — including CDs and Series I Bonds — are getting much more appealing.
If you’re looking for somewhere to keep short- to medium-term savings and earn some interest, both of these can make solid options — though the right choice for you can depend on your financial goals and timeline.
Here’s how CDs and Series I Savings Bonds differ, and why they’re both appealing options for many savers today.
What Is a CD?
A certificate of deposit (CD) is an account that holds money at a set interest rate for a fixed period. It’s an attractive option if you’re looking for a guaranteed return, as CD rates are typically higher than variable rates offered by savings or money market deposit accounts.
You can find a CD at a bank, including online banks, or a credit union. CDs are considered incredibly secure because they’re insured deposit accounts. Your deposits are insured up to $250,000 by the Federal Deposit Insurance Company (FDIC) or National Credit Union Administration (NCUA), depending on which type of financial institution you choose.
Currently, CD rates are on the rise, with some longer-term CDs offering upwards of 3% APY. Like other account types, you’re mostly likely to find the highest interest rates from online banks.
CD yields have increased significantly since record low levels during the pandemic, says Greg McBride, CFA, chief financial analyst at Bankrate. Like NextAdvisor, Bankrate is owned by Red Ventures. As the Federal Reserve continues to actively raise interest rates, he expects those yields to continue to increase, and even more quickly than they already have.
A CD requires you to lock funds for a fixed term, usually between three months and five years. The longer the term, the higher the interest rate you can earn on your deposit. Typically, there are no monthly fees. However, you may have to pay a penalty if you withdraw the money early.
For an emergency fund or other short-term savings you may need to access at a moment’s notice, a high-yield savings account is often the best account type. You’ll earn slightly lower interest rates, but can enjoy easier access to your money while still earning a competitive APY.
While certificates of deposit come with a fixed term and rate of return, different types of CDs offer different options for how you earn money and the flexibility you’ll have.
For instance, a no-penalty CD can help you avoid early withdrawal penalties, allowing you to access your money at any time. But the tradeoff is typically a lower interest rate.
If, instead of flexibility, your goal is to earn the highest return possible, look into high-yield certificates of deposit, typically found at online banks. Or, if you’re looking to lock in a large sum of money, you may be interested in a jumbo CD, which can offer higher rates but often requires a high minimum balance.
What Is a Series I Savings Bond?
A Series I Bond has two rates: a fixed interest rate (currently at 0%) and a variable rate that adjusts based on inflation twice per year. Because inflation today is at a 40-year high, this type of bond is especially appealing right now.
The U.S. government backs and issues Series I bonds, meaning they come with low risk. Plus, they have some tax advantages, including exemption from local and state taxes.
The variable interest rate for I Bonds is currently 9.62%. This is an excellent rate — but it won’t last forever. “It’s only going to pay 9.62% for your first six months,” McBride says. “After that, the rate will fluctuate as inflation does.” The next adjustment will happen in November.
Series I Bond Terms
Like any type of savings bond, I Bonds have terms and withdrawal limitations to keep in mind.
Series I Bonds earn interest for 30 years or until you cash out. However, you can’t pull your money out for the first 12 months. And if you cash in before the bond’s five-year anniversary, you’ll pay a penalty worth three months of interest.
Series I Bond Limits
Besides somewhat strict period terms, there are also limits to how much money you can put in Series I Bonds.
In a calendar year, you can acquire up to $10,000 in electronic bonds from TreasuryDirect. If you’re getting paper I Bonds with your federal income tax refund, you can purchase an additional $5,000. This means that in total you can get up to $15,000 in Series I Bonds in a calendar year.
How Rising Interest Rates Affect Certificates of Deposit and Series I Bonds
The Fed has been hiking its target federal funds rate aggressively this year to curb inflation. In June, the rate jumped 75 basis points. When the Fed meets again in July, it’s expected to again increase its target rate.
“[Rates] are not directly tied to that benchmark rate,” explains Kenneth Chavis IV, senior wealth manager at LourdMurray, a California-based wealth management group. But it is in a bank’s interest to make savings products more attractive to consumers, so it has more money to lend and make a profit.
As a result, interest rates on savings products are on the rise — and will most likely continue to increase in coming months.
On the other hand, I bond rates tend to work on the opposite side of the scale.
Since I Bonds are directly tied to inflation, they become more appealing when inflation is high, like it is today. But if the Fed is successful in its strategy to bring inflation down with interest rate hikes, rates on I Bonds will also drop.
Since I bond rates are set every six months, fluctuating inflation rates can make for a wide range of earning rates over time. “If inflation goes down to 1%, at some point, you’ll be earning 1% on your I Bonds,” McBride says.
How to Decide Between CDs and Series I Bonds
CDs and I Bonds can both help you round out a diversified financial portfolio, especially since both carry competitive interest rates right now.
Consider the goals you have for you money to help you decide.
If you’ll need that money in the next five years, a certificate of deposit is a wiser choice. For longer-term saving goals, Series I Bonds may be a better option. For example, if you’re looking to pad college savings, I Bonds can offer tax benefits and shield your funds from inflation.
Over time, pay attention to changes in overall economic conditions, Chavis says. Since both CDs and I Bonds are highly dependent on what’s happening in the broader economy, different economic environments can change your strategy.
Right now, for example, it’s a great time to buy I Bonds, “because of the benefit you’re getting from keeping pace with a high level of inflation,” McBride says. As for CDs, he recommends waiting to survey the landscape again in another six to 12 months when yields could be higher.
On the other hand, “if we’re in, let’s say, a declining interest rate environment, locking in some of that guaranteed rate on the CDs for a certain period of time makes sense,” Chavis says.
It’s also important to remember that neither of these account types is going to be best for every savings goal, though. For example, if you’re building an emergency fund, keep it in a more flexible high-yield savings account that you can access whenever you need.
Additionally, you’re more likely to get better returns on long-term savings goals by keeping your investments in a diversified, low-cost index fund. These funds are more risky, but you will likely earn higher returns on your balance over time.