Expert: Paul Henneman - 2/26/2009

Question
I'm looking to put away some money for my 14 yr old daughter. But I dont know which is the best way to go. Can you explain the difference between a CD and a US Saving Bond? I've been looking all over the internet,but I still dont know.Which is a better investment?

Answer
Thank you for your question!
    CD's and Savings Bonds are similar in the overall result to the investor, but are different in how they produce returns.
    A CD is a Certificate of Deposit, usually with a bank. In return for depositing funds with the bank for a preset amount of time, the bank will repay you a set amount of interest. This type of investment is usually very safe, the amount of interest you will receive is pre set and not subject to short term fluctuations. However, the amount of interest that the bank is willing to pay does change over time. Currently interest rates are very low, so you may only be able to get 3% or less interest on a CD. This may not even be enough to keep up with inflation.  Once you purchase a CD the interest rate is set for the length of time you select. That is the risk, in that you lock up a sum of money for a predetermined period of time for a predetermined interest rate. If interest rates rise, for example a few years ago CD's were at just over 5%, you still get the original rate at the time you purchased the CD.
   Government savings bonds are eseentially the same thing, except that your deposit is with the government instead of a bank. Also very safe, the only risk being what percentage interest rate you will receive. Typically savings bonds are not subject to state and local taxes, but you should check with a tax expert on that. Some bonds are issued at a set interest rate, but some are issued that fluctuate based on inflation rates.
   Either investment really does the same thing: offer a good place to park money. But the interest payments will be too small for your investments to really grow much. If you are looking for a safe place to store money for your daughter and are not interested in those funds growing much, either would be fine. Both should be very safe places to store funds.
   However, if you are looking to earn a return so that the funds grow over time, then these types of deposits are likely to not accomplish much.

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com