How Do Savings Bonds Work? Should You Invest?
Savings Bonds are fundamentally loans we give to the government to use, to stimulate economic activity. In times of financial crisis or recession, the government benefits if more people invest in the savings bonds because it translates into more money for the government. Savings bonds work the same way any loan does. You give the loan and take interest on it. The rate of interest depends on how much time it takes to pay off the loan. The longer the duration, the higher the rate of interest. In this particular scenario, it is you giving a loan to the government and the government pays the interest. For everyday people, saving bonds serve as a long-term investment instrument that is risk-free.
Types of Savings Bonds
The US government offers two types of savings bonds. There is a limit to the amount you can invest in both types, in a single calendar year. The maximum limit for each series is $10,000, so the total for both cannot exceed $20,000. You must hold the bonds for at least a year before you can cash them. Series I and EE savings bonds both offer a fixed rate of return. The electronic bonds are available in any denomination you may want from $25 and $10,000, down to the penny. As soon as you buy them, interest begins to accrue from the very date.
Series EE Bonds
EE bonds were replaced by paper ones in January 2012. Once you get them you can get interest on EE savings for 30 years or until you decide to cash them. At the end of 20 years, the profit is double the amount you invest and they can continue to add interest for another decade. The current rate of Series EE bonds stands at 0.10% as of May 2020.
Series I Bonds
Series I bonds were introduced in September 1998. In this type, the interest is adjusted after half a year. The interest you get on them is determined by combining the fixed rate and the inflation rate. You cannot take them out before 5 years, and if you do, then you must pay a small penalty. When you buy the bonds the fixed rate is locked on the rate being offered at the time for the entire term, while the inflation rate changes every six months. The current rate of Series I Bonds is locked at 1.06% as of May 2020.
Steps to Buying Bonds
Buying a savings bond is simple. Earlier savings bonds were issued on paper, but since January 2012 this trend ceased to exist. Now you cannot buy paper savings bonds from financial institutions like the bank and credit unions, but have to purchase them online from TreasuryDirect.gov, which is the US Treasury’s electronic savings portfolio platform.
You can own bonds within minutes by following the few simple steps.
Log on to the site treasurydirect.gov and click on “Open an Account.” You will provide your Social Security or taxpayer-identification number and relevant details. If you want to gift bonds, you will enter the recipient’s details.
Next, you will give the savings account number from where you will make the purchase as well as the institution’s routing number.
If you want to open an account for a child, the guardian or parent will have to open their own account first and then the child’s. Both the accounts will be linked and the guardian or parent will operate it till the child turns 18.
You have to choose your security settings and add a “registration” or owner. If you are the only owner of the bond, click on “sole owner.” In the case of two people, you will pick a “primary owner.” Other than that, a “beneficiary” has to be named which is the person who gets the bond in the unfortunate event of the owner’s death.
TreasuryDirect will direct you to a new page, where you choose the owner’s name from the “Add New Registration” menu. If it is a gift, then you click on the “This is a Gift” option.
When you get the account number, you will enter it to receive an email from TreasuryDirect with a one-time use password to access your account. Your account is protected by the password you keep. You can conduct all your transactions online from purchasing, reinvesting, and maintaining your account. There are no fees.
Should You Invest?
Whether or not bonds are a good option for you will depend on the kind of investment your financial situation allows and if the benefits outweigh the cons. Read both the advantages and disadvantages to make an informed decision.
Savings Bonds Are Safe
Buying savings bonds is the lowest-risk investment because it is backed by the US government. So if you are looking for ways to invest and build money in a safe manner, this is the right option. No matter what happens your principal amount stays safe.
Money is Guaranteed
When you invest in these bonds, the return is guaranteed. In times when nothing is certain and every investment poses risks, saving bonds offer stability and security.
There Are No Taxes
Buying the bonds offers tax advantages. The interest you get from these savings bonds is exempt from all taxes, be these state or local taxes.
Minimum Deposit is Needed to Invest
Saving bonds can be owned with an amount as low as $25. So you do not need a huge sum to start investing for the future.
Restriction on Cashing Them
There are rules and conditions that need to be followed if you want to cash them and thus they may not be suitable for those who want running money or who may need funds for emergency situations. You have to wait at least 12 months before you can redeem them. And if you take them out before five years, then you have to let go of three months’ interest.
Though the interest is guaranteed, the returns are typically low as compared to other investment vehicles. If you are looking for a long-term investment, then you can go for it.