What is one benefit of purchasing saving bonds? This is a question I hear a lot when talking with friends and family who have some money put away and looking for solid investment options.
When it comes to ongoing long-term financial investments, many people turn to saving bonds.
With a U.S. government return rate, these fixed-rate bonds are also subject to U.S. government market conditions.
Ideal for individual savers as opposed to big investors, more people find these bond types more approachable and easier to understand.
This is so for those without a financial and investment background whereby such financial decisions are slightly intimidating.
Here we consider the one highly beneficial reason for purchasing saving bonds. We also highlight the many advantages and potential disadvantages that make it worth taking out a saving bond.
That way, if you’re looking to start investing, you’ll have as much financial information before making that final decision.
Why Are Savings Bonds So Popular?
Undeniably, the one benefit of purchasing savings bonds is for the security they offer.
Whereas most investments pose some form of risk, saving bonds get the U.S Government backing.
This appeals to many as they find they come with the faith and credit of a government establishment.
For this reason, such savings bonds boast of a AAA rating from the U.S Government.
With this popularity comes the knowledge that the returns on these bonds aren’t as high as the riskier investments.
For this reason, some looking for huge returns on their investments tend to bypass them.
However, suppose you’re looking for one of the more financially savvy approaches to saving money. In that case, savings bonds are perhaps one of the best ways to start saving.
What are Savings Bonds all about?
Ultimately, these types of bonds are investment bonds. This means that rather than placing money into an account and accessing it regularly, a savings bond requires a lock-in of your money.
This lock-in is set at the beginning of taking on such bonds. However, it does assure you that you will receive interest on your savings for this period.
This is as long as the interest rate remains on your side!
How Do I Set up a Savings Bond?
Perhaps one of the more straightforward investments to set up, a saving bond will need to be created online.
This means heading to the Treasurydirect.gov website and opening an account.
Once you have done this, you will then be presented with the options to select the type of saving bonds you prefer.
Here though, you will also be asked to pay an initial deposit to get your account started.
Once all this is confirmed, you are ready to begin saving. It really is that simple.
The Advantages of Saving Bonds
If you’re considering taking out savings bonds, here are several advantages they can offer you:
- Safer investments
Because of the benefit of being a sounder financial choice, these bonds present a no-risk investment. This means that the safety of your assets is absolute.
- Allow automatic savings
A great thing about saving bonds is that many employers sponsor them too. This means if you wish to, they can automatically deduct the agreed amount from your paycheck.
This way, the process of paying money into your saving bonds is taken care of for you every time you get paid. You can also decide on the amount you wish to contribute to suit your circumstances at that time.
- Encourage a spread of investments
If you are fortunate to already have several bonds and stock, adding a savings bond will diversify potential risk.
This means alongside that risker of investment choices in your portfolio, you’ll also add a no-risk option.
- Taxes are low
All interest made on saving bonds may be subject to federal income tax. However, they aren’t subject to any local or state income.
What’s more, you won’t have to pay federal income tax on such interest until you cash in these bonds. That is if you choose to defer it.
- No sales commissions required
Because of the simplicity of opening a savings bond account, you do not need a broker’s service. Therefore, the costs of investing here are eliminated instantly.
- Require minimum investment amounts
Another huge draw for many people is that a savings bond has a minimum investment figure.
This is great for making ongoing payments. Currently, you can purchase a savings bond with as little as $25 to invest.
- Some employers sponsor bond savings programs
If you are lucky enough, your employer may subscribe to an employer sponsor program.
This means that the amount you contribute to your bonds here can be even lower than the minimum amount required.
The Dis-Advantages of Saving Bonds
As with all financial decisions, there are several disadvantages to taking on savings bonds.
It’s also worth paying attention to these before making your final decision. These include:
- Low returns
In exchange for a safe return, saving bonds offer low returns. So, if you’re after significant returns on your investment, then these may not be the choice for you.
Of course, there are higher interest rate accounts, bonds, and plans that will yield greater returns.
- Unable to redeem bonds when it suits
Another factor to consider when taking on saving bonds is the inability to redeem them at will. This means waiting a year in full.
Plus, if you redeem them within the first five years of opening, you’ll lose the last three months of interest you’ve earned.
So, if you’ve experienced cash flow issues in the past, you may not find these practical.
Likewise, if your employment is insecure, you won’t be able to access your cash when you might need it the most.
Savings Bonds Are the Best Fixed Rate Savings Solutions Long-term
Without a doubt, these U.S. saving bonds are designed as a long-term investment choice.
This means that they cannot be cashed in during the first year of opening.
It’s also worth noting the potential penalties of cashing such bonds before the five-year stage has passed.
But it’s precisely because of this long-term duration that saving bonds can offer a guarantee of almost doubling their value.
Over a 20 year duration, with a fixed rate and all taxes deferred before cashing in, you could expect your bond value to double!
It’s for this precise reason why many parents and grandparents choose a savings bond for new-borns.
Weighing up the Advantages and Disadvantages of Saving Bonds
With the many advantages and potential disadvantages clear, it is perhaps worth remembering the one benefit of purchasing savings bonds. That is ongoing security.
These types of saving bonds may not be for everyone. Still, undeniably, they allow you to put money aside at an amount and time to suit your individual circumstances.
Who Will Benefit from Savings Bonds?
Saving bonds will not work for everyone. However, they are ideal for those who have a definite savings goal in mind.
As your money is effectively locked away until this is finished, you can just let your bond do all the work behind the scenes!
For his reason, they are popular for goals such as future weddings and indeed higher education.
There are many types of situations and circumstances that will benefit immensely from a savings bond.
- Grandparents and parents –
Opening a savings bond has always been a preferred choice of gift for newborns.
Due to the longer terms attached to such bonds, they will have a fantastic lump sum at their disposal by the time the newborn reaches adulthood.
- Children –
For those children who have yet to begin saving, a saving bond is ideal for encouraging them to start.
It’s also a more practical way to ensure they don’t use what is put aside for the sole purpose of saving!
- People looking to pursue higher education –
In a country where higher education fees are immense, savings bonds can be one means of saving for this.
With many young adults and indeed, those more mature of adults missing out on higher education due to spiraling fees, saving bonds are one means of achieving such a goal.
- People looking to get on to the housing market –
Not everyone can afford the often-hefty deposit that comes with a mortgage. So, a savings bond could open up the possibility of saving for it instead.
What’s more, if you can present a large chunk of money to the bank when applying for a mortgage, you could just look at negotiating a smaller mortgage and/or better terms as a result.
- People looking to buy a car –
For so many, owning a vehicle is a considerable expense that, along with the initial layout, is simply out of reach on a standard salary.
This is where a savings bond could help take the pressure off.
What’s more, it could give you the chance to save enough for both the car itself and much of the necessary fees that come with getting it on the road. It could also take care of running it for a while to come afterward.
- People looking at retirement options –
Though it seems too early for most to begin talking about it, a savings bond is an excellent choice to save for those later years of life.
Not everyone can afford or want to use those riskier pension investments. A saving bond, especially when attached to an employer, will allow you to build for the future at a steady pace.
It will also offer you increased interest on these savings by the time you cash in.
- People who have money to spare –
One of the things that may put some off savings bonds is the idea of locking money away for a restricted time.
However, suppose you won’t be needing to use any of your spare cash to cover any unexpected expenses. In that case, it could do better in such an account.
Saving bonds could work well for those people who already have another account set up and money put aside to account for any unexpected events.
- People looking for more secure ways to save –
If you find yourself tempted to dip into savings accounts regularly, a saving bond will prevent such habits!
Unfortunately, those savings accounts that allow you instant access to cash offer much in the way of temptation. This is especially so when you see that balance getting high.
A savings bond removes the possibility of accessing your cash at a whim and encourages better saving habits as a result.
- People who have a lot of money to invest –
If you do have a great deal of cash and are looking to place it over several scattered investments, you can’t go wrong with saving bonds.
Offering a different form of investment type, they will act as the more secure investments you can put to one side while you get on with those risker types.
Final Thoughts on the Benefit of Purchasing a Savings Bond
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 opening a saving bond.
Suppose you have been particularly discouraged by entering any type of investment because of its risk. In that case, these could well be the safest choice for you.
An excellent low-risk way to save for whatever reason, saving bonds come with many terms.
Meaning you can, in fact, ensure a specific term that is perfect for your individual needs.
If keeping your savings secure is important to you, then this is one financial choice that may well be the best one you make.