Investing definitely comes with its risks. But if you’re just getting started and you want to proceed with caution, you might want to consider buying a savings bond. It’s lower-risk and cheaper than investing in most other types of securities, like stocks. Best of all, you’ll be able to watch your money grow from a distance and you can use it later on for just about anything, including retirement.
How Savings Bonds Work
Buying a savings bond is like loaning money out to a reliable friend who always pays you back. In this case, you’re letting the government borrow money for a set period of time that can be anywhere from one year to 30 years. You’ll automatically earn interest as time goes by and you can sit back and relax until you’re ready to retrieve your money.
Federal savings bonds are not get-rich-quick schemes, however. You can’t redeem them at all for an entire year and if you’re not willing to wait at least five years before collecting your cash, you’ll face some consequences. The U.S. Department of Treasury will keep the interest that accrued over the last three months before you took the funds from your bond.
But after five years, you’re in the clear and you can get your money back at any time. The lowest amount you can contribute to a savings bond is $25. The highest amount that you can chip in within a year is $10,000.
Series I Bonds vs. Series EE Bonds
There are many types of bonds, but if you’re interested in getting a government savings bond, you have two options. You can go for a Series I bond, which pays you a fixed-interest rate (currently 1.48 percent) based on inflation. This is designed to prevent investors’ money from losing ground to inflation.
You can also go for a Series EE bond that doesn’t take inflation into account, but ensures that after 20 years your original investment will double. The interest rate for a Series I bond won’t change. Interest for EE bonds, however, is variable. Until the end of April 2015, you’re earning interest for the year at 0.10 percent.
With either type of savings bond, you’re buying them at face value. That means that if you spend $100 on a savings bond, you can expect to get back at least $100.
Should I Buy a Savings Bond?
There are other benefits to buying savings bonds besides their low cost and low risk. They make great gifts for picky people who can’t seem to decide what they want for their birthdays. You could even prevent someone from taking out a heap of student loans by using a savings bond as a future college fund. And if you’re looking for a tax break, get excited. You won’t have to pay any local or state taxes on the interest you earn – and you can hold off on paying federal taxes until you’re ready to pocket the money from the bond.
Of course, as with other types of bonds, there are also some drawbacks. You won’t earn as much interest from savings bonds as you would if you invested in something riskier like stocks. Plus, you’ll have to worry about how the value of the dollar will change in the future with inflation, particularly if you buy a Series EE bond. You might not beat inflation at all with a savings bond. There’s also the possibility that you’ll end up with a lost savings bond if you misplace it or forget about it altogether. If this has happened to you, you have the option of searching the government’s Treasury Hunt database to claim your missing funds.
If you’re highly concerned about inflation, you can consider getting a TIPS (Treasury Inflation-Protected Securities) bond, which comes with a fixed interest rate like a Series I bond. These bonds can be bought and sold and you only have to keep the money in your account for 45 days. They’ll cost you at least $100, but you’ll be getting interest payments twice a year.
How to Buy Savings Bonds
Back in the day, people who wanted to buy savings bonds had to go through the trouble of visiting a bank or another financial institution where the bonds were sold. Now, the process is a lot smoother and a lot less expensive.
Instead of paper savings bonds, you’ll be able to buy a digital version online at the Treasury Department’s TreasuryDirect website. It’ll take you about 10 minutes and you won’t ever have to worry about losing the bond somewhere in your house. Want your child to have a savings bond too? You can set it up inside of your account and he or she can transfer the funds to a separate account at age 18.
When you’re ready to cash in your digital savings bond, you can have your money sent directly to your savings or checking account. It’ll be ready to use within a couple of days. If you’ve still got a paper bond laying around, you can have it converted to an electronic bond. Or, just redeem it in-person at a local bank or by mailing it to the Treasury Retail Securities Site.
The Bottom Line
Buying savings bonds can be a great way to enter the world of investing if you’re not a big risk-taker. They can also make great gifts for weddings and baby showers. But unless you buy the type of bond that adjusts for inflation, it’s a good idea to prepare for the possibility that your money maybe returned to you (or the gift recipient) at a lesser value. And remember that bonds can’t compete with stocks when it comes to returns.
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