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Savings Bonds: When to Consider Them as an Alternative Investment

flickr.savingsbond.karendSavings bonds: before writing for Money Under 30, all I knew about them was that I thought they were a terrible gift when I was little! I remember getting savings bonds as prizes in elementary school, looking at how long they would take to mature, and just thinking: “What the heck do I do with this!?”

Now that I’m older and hopefully wiser, I’m learning that government savings bonds are worth at least slightly more respect and consideration.

What is a savings bond?

The official definition of a savings bond is “a debt security issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs.”

In plain English, a savings bond is essentially an IOU from Uncle Sam. When you buy a savings bond, you loan the government money. When you redeem a savings bond, the government pays you back – with interest.

In the past, savings bonds were paper documents with serial numbers that you could buy at a bank or via the mail.

Today, you have to buy them online. But that’s a good thing, because before you could only buy paper savings bonds in predetermined values. Now, you can do it in penny increments.

There are two types of savings bonds.

  • Series EE U.S. Savings Bonds (also called Patriot Bonds): This type is sold at face value. You’ll pay exactly what it’s worth (like $100 for a $100 bond). It’s worth its full value when you redeem it, and the interest is issued electronically to your bank account. The maximum you can buy is a face value of $10,000 in one calendar year.
  • Series I U.S. Savings Bonds: These are also sold at face value and have a maximum of $10,000 that you can purchase in one calendar year. Series I savings bonds are inflation-indexed meaning they offer a fixed rate of interest, adjusted for inflation. Unlike EE bonds, series I savings bonds are meant to be a longer-term investment. When you redeem the bond, you get back the face value plus all accumulated interest.
  • Note: There used to be a third type, the Series HH savings bond, but it was discontinued in 2004.

With bond series EE and series I savings bonds, there is a $10,000 maximum you can purchase in a calendar year. You must hold the bonds for at least one year and they will pay interest for up to 30 years. If you redeem them in less than five years, you’ll forfeit interest payments for the three most recent months.

Why buy savings bonds?

Savings bonds provide savers with a number of benefits including: diversifying your risk (so that you’re not only investing in stocks and bonds), knowing you’re making a safe investment, avoiding paying sales commissions and tax benefits (such as no federal income tax on the interest if used for educational expenses).

However, there are also some cons. Unlike money in a savings account, you can’t redeem savings bonds for at least five years without sacrificing some of the interest.

Second, if you redeem the bond at a time before the interest is posted for the month, you could lose that interest. At the end of the day, savings bonds aren’t an investment you want to use for money that you could need on a moment’s notice. If, however, you want to invest a lump some for a longer time period but don’t want the risk that comes with the stock market, savings bonds are a viable alternative.

The U.S. Department of the Treasury has answered a lot of savings bond FAQ’s here, so make sure to read their tips before investing in a savings bond.

About Maria LaMagna

Maria LaMagna is a recent graduate of Northwestern University where she served as editor-in-chief of the university’s award-winning daily newspaper and studied for five months in Argentina. Before joining Money Under 30, Maria worked as a reporter for CNN and the Indianapolis Business Journal. Follow Maria on Twitter @MCLaMagna.

Comments

  1. You left out a lot of important details, like I bonds and EE bonds cannot be redeemed for the first year after you bought them. EE bonds are currently giving out only 0.2% interest, however if you hold EE bonds for 20 years the value jumps to double what you paid for it. I bonds pay whatever inflation is plus a fixed rate (currently 0%, but was 4% a few years ago), but if deflation occurs then the inflation rate is set to zero rather than going negative.

    EE bonds are pretty worthless for most people unless you are holding them until the 20 year mark, even then it doesn’t make much sense unless you have a fairly high income and have run out of tax advataged space in IRAs and 401k.

    For anyone under 30, I think I bonds are the only government bonds you would consider having. I bonds make a decent choice as a place to store emergency funds, just make sure you have extra emergency funds for that first year after you buy the I bonds.

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