U.S. savings bonds are essentially a loan you make to the government. When you buy a savings bond, you are giving money to the government in exchange for a guarantee you will get that money back, plus interest, at a predetermined later date. Investing in U.S. savings bonds is a good potential investment for new investors or anyone else looking for simple, cheap and low-risk investment options. 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.

If you’re considering savings bonds for your portfolio, a financial advisor could help you determine an investment strategy.

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.

U.S. 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 1.20%) 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. Essentially, you buy these bonds at half their face value and the treasury guarantees they reach face value in 20 years, The interest rate for a Series I bond won’t change. Interest for EE bonds, however, is variable. Until the end of April 2025, you’re earning interest for the year at 2.60%.

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.

Savings Bonds vs. Other Low-Risk Investments

U.S. savings bonds are a popular choice for many conservative investors, as they offer secure, government-backed returns. This type of investment is particularly appealing for those prioritizing safety over high returns, especially with Series I bonds that adjust for inflation. However, if you’re looking for other low-risk investments, there are some alternatives.

Certificates of deposit (CDs), for example, offer fixed interest rates for a set period and are issued by banks. They guarantee returns but require you to lock in your money, with penalties for early withdrawal, unlike savings bonds which are more flexible.

Money market funds and other government securities like Treasury Inflation-Protected Securities (TIPS) also cater to different investor needs. Money market funds are highly liquid, making them suitable for those who might need quick access to funds, whereas TIPS protect against inflation, adjusting their value to match the Consumer Price Index.

So, as alternatives to savings bonds, you may consider investing in CDs if you prefer guaranteed returns and do not need immediate access to that money. And, if you need immediate liquidity, money market funds could be a better option for your portfolio, while TIPS are optimal for protecting investments against inflation.

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.

U.S. Savings Bonds History

U.S. savings bonds were born in 1935, when President Franklin Delano Roosevelt signed a low letting the Treasury Department sell a new bond security. The first bonds were released a month later and had a face value of $25.

Special War Savings Bonds were released after the attack on Pearl Harbor to help find America’s efforts in the Second World War.

For much of the history of U.S. savings bonds, they could be purchased at banks. Since 2012, though, you can only buy U.S. savings bonds directly from the government at a designated website.

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 may be returned to you (or the gift recipient) at a lesser value than you expect. And remember that bonds can’t compete with stocks when it comes to returns.

Investment Planning Tips

• Want help with investing in U.S. savings bonds and other securities? SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Asset allocation is key to a good investing plan. You need to know how much of your money should be ins securities, fixed-income investments and cash reserves. Get a sense of what your situation should be with SmartAsset’s asset allocation calculator.

Photo credit: ©iStock.com/Motortion, ©iStock.com/Jitalia17, ©iStock.com/Valeriy_G