We all know that savings are important.  You need to stash cash away in case of emergency and, as we pointed out recently, an adequate level of savings can act as a platform to increase your overall investment profitability.

The problem wtih dumping money into a savings account, however, is that it’s not growing very much.  Interest rates on savings accounts are low.  The only difference, in real terms, between putting money into your run-of-the-mill savings account and stuffing it into a mattress is FDIC insurance.  In the end, that can actually make savings a negative experience.  If inflation outstrips the interest earnings on the account (which it usually will), you’ll be losing buying power every day that your cash sits in the account.

And that’s why you might want to take a look at savings bonds.  Specifically, I Series bonds issued by the U.S. Treasury Department might be the right way for you to save your money.  Unlike EE Series bonds that offer a set level of interest over time, I Series bonds have a rate based on inflation levels (plus a little extra).  You’re guaranteed that your savings bond purchase will not lose buying power due to inflation.

Currently, I Series bonds are set to inflation + .7%.  That .7% kicker is a recent development.  For a short period of time, the U.S. was issuing I Series bonds that were keyed only to inflation.  The extra .7% in interest earnings was instated earlier this month. You have to hold the bonds for at least twelve months before cashing them out.  If you hold them for less than five years, you will get hit with a three-month interest earning penalty.

I Series bonds aren’t a great investment.  They aren’t the kind of long-range move that will single-handedly provide you with retirement security.  You won’t get rich by sinking a few grand into I Series bonds.  What you will do, however, is create a relatively liquid “savings account” that will accrue interest at a level guaranteed to outstrip inflation.  That makes them a very good substitute for traditional savings accounts.

That’s only true, however, if you feel comfortable locking up your savings money for at least twelve months.  If you’re operating with nothing more than an emergency fund and you need to maintain access to that cash at all times, purchasing bonds might not be the way to go.  Jeremy Vowinkle from About.com explains:

U.S. savings bonds are certainly a safe place to save money, but you want to make sure that you’re putting money into bonds for the right reasons. Remember, the interest rates can be higher than a typical savings account, but there may be some liquidity concerns to contend with first. If there is a chance you may need access to the money inside of one year, keep in mind that you cannot redeem a savings bond until one year has elapsed. In addition, you will forfeit three months’ interest if you redeem a bond prior to five years.

Purchasing I Series bonds is easy.  You should be able to conduct the transaction at just about any bank.  You can also set up an account at Treasury Direct, the Treasury’s Department’s website, and handle the matter online.  If you want details about purchasing bonds at a bank, check out this great rundown from My Money Blog.

Bonus Tip: If you want to improve the performance of your I Series bond performance, make your purchase at the end of the month.  My Money Blog explains why this little “trick” makes sense:

A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy on October 31st. You’ll be able to sell on October 1st, 2009 for an actual holding period of 11 months. (3-month interest penalty still applies.)