15 Aug Should I get a high interest account or I Bonds?

Q. With higher interest rates, I’m trying to decide if I should find a high paying money market or use I Bonds. What is smarter? The money is my emergency fund.
— Saver

A. You’re right that higher interest rates mean investors can get much better rates on their own savings.

It’s smart to look for higher rates when you park your emergency fund.

The best place for this emergency money would be in a money market account instead of using I Bonds, said Dan Crimmins, a wealth manager with Modera Wealth Management in Westwood.

He said there are several money market bank accounts that are paying a higher rate than the I Bonds.

“Even if the interest rates were comparable, the money market account would still be the better choice as I Bonds have some negative features if there is a potential short-term need,” Crimmins said.

First, I Bonds lock you in the first year, leaving you unable to sell, he said. In addition, there is an interest penalty if the I Bonds are redeemed in the first five years.

Both features are a negative when used as an emergency fund, he said.

It is best to have emergency money earning the highest rate possible without any withdrawal penalties in case that emergency does come to fruition, he said.

“Luckily, there are a few banks currently paying over 5% yearly interest for money market accounts,” he said. “Remember to explore online banks as well, and make sure that the banks that you explore have FDIC insurance.”

He said it’s also worth looking at brokerage accounts such as with Vanguard or Schwab, which have a few money market funds currently paying just over 5% annually.

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This story was originally published on Aug. 15, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.