Should college students buy savings bonds?

Dear Dr. Don,
Are savings bonds a bad idea for college students? Would a simple savings account work better? I have always been good about saving money, but recently it has all gone to school expenses. If I ever get my hands on some extra cash, I want to make sure I put it in a good place.

Thanks,
-- Amber Accumulates

Dear Amber,
I wouldn't recommend savings bonds for a college student. You can't cash them in for the first five years without paying a three-month interest penalty for early redemption.

And if you're like most college kids, you'll need that money before then. After graduation, you may decide to go shopping for a car or a house. You may want some new furniture, or you could be asked to relocate cross-country for a new job.

You'll also want to stay fairly liquid as you build up an emergency fund as a buffer against short-term financial pressures. A common recommendation is for an emergency fund to be large enough to cover three to six months' living expenses.

I recommend that you put your money in a savings account instead. Look for a high-yield savings account or money market account so you have ready access to your savings.

If you're still interested in savings bonds, please note that you won't be able to cash in anytime soon. You must hold a Series EE bond for 20 years to earn a yield of about 3.53 percent. If you cash it in early, that yield will drop.

The Series I savings bond is a better savings vehicle if you plan to hold it for more than five years. By doing so, you'll avoid the early redemption penalty. You'd earn two different yields on a Series I bond: a fixed yield, which is currently zero percent, and an inflation yield that is based on changes in inflation as measured by the consumer price index.

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Source: http://www.bankrate.com/finance/savings/are-savings-bonds-bad-idea-students.aspx

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