Municipal bonds and savings accounts are both members of the liquid assets family, but the two investments have some major differences. For starters, savings accounts are the ultimate liquid asset in that you can usually avoid paying transaction fees to withdraw it from the bank and spend it. Cashing in a municipal bond before its maturity date will probably cost you a broker's commission and the possible loss of some interest and principal depending on the market conditions that exist when you make the sale.
Another important distinction between municipal bonds and savings accounts is that investors who own municipal bonds can sell them before they mature to other investors. Savings accounts, on the other hand, cannot be sold to other depositors at the bank or to any other investor. Thus, municipal bonds are negotiable IOUs. Savings accounts are not.
Municipal bonds and savings accounts are both loans, although the terms and conditions of the loans are different. A municipal bond represents a loan to a state or local government that is raising money for some public project, such as a school or library, and investors who buy the bonds issued by the government entity are loaning the money long term -- usually for several years -- with interest. People who deposit money in a savings account are loaning money to the bank, which the bank uses to make other loans for cars, homes, etc. A bank depositor can chose to leave his money in the bank as long as he wants while collecting interest, or he can decide to withdraw all or some of it at any time, usually with no fees.
Interest and Capital Gains
You are likely to earn more interest income from a municipal bond than you would from a savings account with equal amounts of money invested. A municipal bond also is an investment that trades on the financial markets and other investors may at some point be willing to buy the municipal bond for more than you paid for it. There is no chance of a savings account making any type of capital gain because it cannot be sold to anyone else. The value of a savings account will only make substantial increases in value by its owner making more cash deposits into the account.
There are some risks involved with investing in municipal bonds and putting money in savings accounts. Municipal bonds are backed by the full faith and credit of the taxpayers in the municipality where the bond is issued. Municipalities on rare occasions have been known to go bankrupt. But as long as the municipality issuing the bond is on good financial footing, the interest payments and the return of the original principal is probably safe. Savings accounts also carry some risk because banks can fail. But savings accounts are insured by the Federal Deposit Insurance Corp. for up to $250,000.
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