Saving bonds are basically you loaning money to the US government. The Department of Treasury is offering these debt securities to help with the US borrowing needs. It is widely considered one of the safest ways to invest your money because well, the US government is your borrower.
If we have to pick just one benefit of purchasing saving bonds it would be this: It is backed by the US government. What it means in real life is that the federal government will guarantee your savings and you can expect a pretty stable return. For some people, that is a big benefit.
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More Saving Bonds advantages:
- Tax Benefit
There is no state or local tax on the interest you make with the bonds. You can also postpone your federal tax until your cash out your bonds or until it matures. You can also claim tax benefits if you use the savings for specific purposes like education and similar. You can read about it here
- Gift Benefit
Unlike other securities, Saving Bonds can be held by minors under their own name. Which makes them a great gift for your kids or even as a vehicle for savings or fund a future college spend. Many people use these bonds as another retirement savings account.
- Affordable
You can start buying bonds with as little as $25, which is much lower than most saving investments.
- Competitive rates
Saving bonds offer a competitive rate compared to the market and the level of risk. The last 10 years average interest rate earned on these bonds have been %3.86 which might sound low to some, but considering the level of security it brings, this is actually a very competitive rate.
Why Are Savings Bonds Popular
The main reason bonds are very popular is the reason they hold very little to almost no risk. With every investment there is always some risk, some are ok with higher risk to gain higher returns, while others are looking for the security and knowing that their investment is safe.
Because the US government is backing these bonds, they are considered to be one of the safest ways to invest your money and get a stable, long term return without having to worry about it.
Most investment firms recommend using these bonds as part of your investment portfolio to balance out maybe more riskier investment vehicles – especially for the everyday person who doesn’t want to carry much risk.
How to buy saving bonds
There are two types of bonds that are available to buy, let’s see the differences between the two:
| Electronic ( EE ) | Paper ( Series I ) |
| An appreciation saving security, you can buy these at face value, meaning you will pay $50 to but a $50 bond. When you sell the bond, you will get it’s full face value in return. The interest payments are made electronically directly to your bank account. There is a limit of $10,000 per year of this type of bond and if you cash out within five or less years from the time of buying you will lose three months of interest payments as a penalty. After five years there is no penalty. | These types of bonds are sold with a maximum of $10,000 per year and they offer a fixed rate of return which is adjusted for inflation. Similar to the EE series if you cash out within five years or less you will get a penalty in the form of three months of interest payments. |
| How to buy | How to buy |
| You need to open an account on TreasuryDirect online and then you will be able to buy whenever you want. You can even set up automatic recurring payments from your bank account, or send the IRS form 8888 with your federal tax return and buy bonds with your tax refunds if any. You can also set up automatic buy bonds from money from your paycheck. | You can submit an IRS form 8888 with your federal tax returns and assign your refund ( if any ) to purchase series I bonds. Your security will be mailed to you |
| How to track value | |
| Access your online account on TreasuryDirect and print out the value | Browse to treasurydirect.org and use the savings bond calculator |
| How to change registration on bonds | |
| If you’re a single-owner or beneficiary bond owner: Access your account online and click the ” How do I…?” section to learn how to make changes online. If your bonds are registered on more than 1 owner you will need to complete a form on treasurydirect.org and have all owners sign it and mail it in. | You will need to mail in the correct from from treasurydirect.org and sign it, if you have bonds that are joint or have more than 1 owner all parties need to sign the form. |
| How to cash out my bonds | |
| Go to your account online and authorize redemption directly to your savings or checking bank account. | Take your bonds to a local bank or credit union and sign each one to receive cash value in exchange. |
Are there any cons to saving bonds
Like any investment tool, each comes with their own pros and cons, and this one is no different, although I would say these are not really cons, but rather notes to think about based on your own needs and life.
- Low returns ( to some )
While an average of %3.86 is not that bad, it is still considered relatively low compared to other investments, Investing in the stock market for example can give you between %7-%10 Annually historically* and there are many other methods of investing that can yield a better return, but obviously, with their own risk as well.
*Past performance and data does not guarantee future results.
2. Limits and penalties on early cash out
This investment tool is meant to encourage people to keep their savings for the long term, but if you need it before the first five years have past, you will pay a penalty in the form of three interest payments. Also if you have Series I bonds you will need to physically go to a bank or credit union to cash out.
3. Limit on how much you can buy per year
So as previously mentioned, you can only buy $10,000 worth of bonds from each series each calendar year, which for some people will be a con if they want to invest more. For people with a lot of liquid cash, this limit will cause them to spend years just buying these bonds, and while they wait they will lose money.
How saving bonds work in plain words
A bond is basically just a piece of paper ( either physical or digital ) that you get when you lend money to a third party. Savings Bonds are basically lending money to the US government, so each time you purchase a saving bond, you lend a little money to the government and in return you get a piece of paper.
As long as you hold that bond, you will be paid interest on your money you lent. The specific thing that is great about the Saving bonds is that it is backed by the government so you know you will get what you can expect.
How do Savings bonds earn interest
Your saving bonds will earn interest every month by they will accrue only twice per year. This means that every six months your balance will increase by the previous balance + the interest earned during the last six months, and so on.
Final Thoughts
Available to all U.S. citizens over 18 – if you have a social security number, U.S. address, and U.S. bank account, you should have no problems purchasing a saving bond.
If you know you don’t need the cash back for at least a couple of years, this is a great alternative to a regular savings account that will pay you more with almost zero risk.
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