Chances are you’ve spotted the term ‘savings bond’ when browsing your bank’s brochure or website.

But what are savings bonds and how do they work? Use this guide to learn more and discover how savings bonds could benefit your finances.

What is a Savings Bond?

A savings bond is a financial contract that you set up with a lender, like a bank. It is a fixed-rate, fixed-term investment which means that your money is invested for a set period of time and will return a set amount of interest. 

Savings bonds are similar to savings accounts in that both options provide a place where you can safeguard your money. Both options also give interest on your savings which means your money increases while in the account. 

However, unlike a bank account, you cannot withdraw money from a savings bond. Additionally, while you can close a bank account at any time, you cannot end a bond investment early.

How Do Savings Bonds Work?

To set up a savings bond, you simply have to contact your lender. They will take you through the details of the contract such as the end date and frequency of interest-rate earnings payments. All that remains to do then is to deposit a lump sum into the bond. 

Before you investigate the option of fixed-rate bonds, work out how much you can afford to invest. Remember that you will not be able to touch those funds until the bond expires, at which point the money is released back to you. 

Low-Risk Investment

Savings bonds typically have a set interest rate that is not influenced by external variables. This makes them a low-risk investment compared to the likes of stocks where there is a chance of loss.

However, this fixed interest rate doesn’t take into account inflation. As we have seen with UK inflation rate trends this year, this can rise or fall in a matter of months and might result in your bond making a real-terms loss.

Bonds are largely seen as beneficial, especially those who are risk-averse or unfamiliar with non-bank investments. It is also a safe, convenient, and easy option for those who are too busy to manage a more diverse portfolio of investments.

A Steady Stream of Income

You will receive regular payouts from your savings bond. These are typically annual but can be monthly or quarterly. The amount will depend on the size of your deposit and the bond interest rate.

Having frequent, reliable payments makes it easier to budget. This means that you can make firm plans for spending this money, particularly beneficial for retirees and families with children.