When you were little, your parents and grandparents most likely wanted the best for you and your future. Chances are, your well-meaning granny sent you money in the form of a $50 savings bond every year for your birthday with a note that said, “Don’t spend it all in one place!” Thanks, Granny. Let’s just say you weren’t too happy that you couldn’t spend it on new toys.
So now that you’re an adult, what are you supposed to do with all those certificates? How much interest do they earn? When and how do you cash them in? Great questions. But before we get into the nitty-gritty, we’ll start with the basics: What are savings bonds anyway?
What Are Savings Bonds?
Savings bonds are the government’s way of taking loans from citizens at a small rate of return or interest to help you save for retirement or your kid’s education over a longer length of time.
Here’s how Investor.gov defines them: “Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.”1
Translation: Your granny bought a few certificates in your name, allowing the government to borrow her money long term (with interest) in the hope that it would grow into a nice pile of cash for you to use when it’s time to go to school. And by the way, if you don’t use it for your education, you’ll have to pay taxes on the money you receive.2 Probably not what she had in mind.
Types of Savings Bonds
Over the years, there have been many different types of savings bonds issued by good ole Uncle Sam. Many of those aren’t around anymore (ahem, remember a little something called war bonds?).
Today, there are generally two different types of bonds you can purchase: Series I and EE bonds. Both bonds are backed by the “full faith and credit” of the government (whatever that means), and both collect interest over a long period of time.3 The biggest difference between the two is how they collect interest.
Series I savings bonds are offered by the U.S. Department of the Treasury as a way to add to your retirement savings.4 These bonds are sold both electronically through TreasuryDirect.gov and as paper certificates. (They’re also the only bonds you can buy in paper form anymore, if you use your tax refund to purchase them.)
The electric bonds are sold at “face value,” starting at $25 and going up to $10,000. The paper bonds start at $50 and can be purchased up to $5,000 (but only with your tax return).
Series I bonds earn interest on their fixed interest rate annually along with an inflation rate (earned semiannually, or every six months) for up to 30 years or when you decide to cash in.
The Treasury awards your bond a specific interest rate called a composite rate, based off this fun little formula:
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] 5
Here’s the downside: Your fixed rate could end up being zero if the inflation rate is in the negative. That means you won’t earn interest on your bonds for that period of time (which means your money is just sitting there . . . doing nothing). When it’s time to cash in and your bonds stop earning interest (at 30 years), there’s a chance your money hasn’t grown at all. Yikes.
EE bonds can only be purchased digitally, and like Series I bonds, you can purchase them at face value to the penny (over $25). So if granny wants to buy a bond for $53.14, she can do it.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
Just like with the Series I bonds, you can only purchase up to $10,000 in bonds per year (or per person).
With EE bonds, you’ll earn a fixed interest rate for 20 years. After 20 years, the bond will double in value and continue to earn interest for another 10 years. After 30 years, all bonds have fully “matured” or aged and will no longer earn interest. That goes for the Series I bonds too.
If you’re absolutely sold on buying savings bonds, the EE bond is the way to go. Not only will it ensure that your money is earning something (even if it’s a small amount), but it also ensures that your savings will double at 20 years—if you don’t touch it.
New fixed rates are announced every May and November. Currently, the rate of interest for an EE bond is .10%. Big money!
How Do I Cash in My Bonds?
The point of a savings bond is to save your money (and earn interest) over a long period of time. By cashing in before the bond matures (at 30 years), you’ll miss out on any future interest.
That being said, you can cash your bonds one year after purchase. And if you cash in before five years, you’ll lose the last three months of interest your money earned.
You can cash in online through the TreasuryDirect site or take your paper bonds to a local bank or credit union.
Should I Invest in Savings Bonds?
Let’s put it this way . . . there are better ways to invest your money. But Grandma and Grandpa aren’t wrong for trying to set you up with a pile of cash to be used when you’re older (and less likely to spend all the money on Legos). And while those well-meaning savings bonds aren’t all bad, there’s a much better way to invest your money.
Since savings bonds gain interest at the rate that paint dries, you’re going to be waiting a very long time to see any sort of return. And even then, your EE bond will only double in value. (There’s no telling what your Series I bond will do.)
So, if you’re looking to save for the retirement of your dreams or help your kids go to college, you’re putting your hard-earned money in the wrong place. For retirement, save your money in a 401(k) or 403(b) account. Not only will it help you gain more interest over time, but you’ll have full control over the accounts. Plus, if you’re lucky, your employer will match your investment up to a certain amount per year. Score!
As for saving for college, it’s best to invest in a 529 savings plan with good growth stock mutual funds. Not only can you save money for Jimmy’s education, but if he decides not to use it, you can give it to your grandkids!
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