As you consider options for investing your savings, you may think of savings bonds, which used to be popular when interest rates were higher. Maybe it’s because you received one as a gift when you were younger.
You may find yourself asking, “What is a bond exactly, and is it the right investment for me?”
A bond is a kind of debt investment where you lend a specific amount of money to the government or a company. In exchange, you earn a set interest rate over a specific time frame on your investment. One of the most well-known types of bonds is the savings bond.
Savings bonds aren’t insured through the Federal Deposit Insurance Corporation (FDIC), like bank savings accounts are insured, but it is still backed by the U.S. government. This makes them an extremely safe, low risk investment.
The interest rates on a savings bond are currently very low — not much more than a regular savings account and lower than other long-term investments. Savings bonds must be held one year and you face a penalty if you redeem before a five-year time period. When your five-year period is done, you are able to redeem the bond or let it continue to grow for up to 30 years..
Savings bonds won’t make you rich, but they have some advantages. There are no fees and you can sock away as little as $25 at a time. Additionally, savings bonds aren’t subject to state or local taxes and you don’t have to pay any federal income taxes until the maturity date. The profits are tax-free if they are used for education payments. Lower tax rates are also in place if they are redeemed for dependents.
The two types of savings bonds are Series EE, which has a fixed interest rate, and Series I, where the interest rate adjusts based on inflation every six months. These used to be available as paper bonds but are now available electronically through the TreasuryDirect online system. Paper bonds are still valid.
Another savings option backed by the federal government is a Treasury bond. These have 30-year terms, and the fixed interest rate is paid every six months. They can be purchased online or through a bank or broker. The minimum purchase is $100. You can also buy a mutual fund made up of Treasury bonds.
Savings bonds and Treasury bonds are just two options for a conservative investment portfolio. You may want to consult a financial planner to find out if either or both of these options fit into your investment plan.