Do you want to diversify your portfolio but wondering if savings bonds are safe investments? Well, savings bonds have long been considered a low-risk investment choice. But their interest rates are relatively low, which has made some investors explore other investment opportunities that offer higher returns, such as stocks and cryptocurrencies,
However, savings bonds remain a popular choice for investors who seek to balance their portfolio and reduce risk with a guaranteed rate of return. This article will discuss savings bonds and their pros and cons to help you decide whether they are a suitable investment.
What are Savings Bonds?
Savings bonds are debt securities issued by the U.S. Department of Treasury to help fund the government’s operations. When you purchase a savings bond, you are essentially loaning money to the government, and in return, the government pays you interest on your investment. Savings bonds are considered low-risk investments because they are backed by the full faith and credit of the U.S. government.
To be eligible to purchase U.S. Savings Bonds, you must be a U.S. citizen, official U.S. resident, or U.S. government employee. You can buy bonds in penny increments, with the lowest investment value starting from $25 and a maximum of $10,000 in one calendar year. Also, if you have a federal tax refund, you can invest up to $5,000 of that refund in paper I bonds.
Types of Savings Bonds
There are two main types of savings bonds;
- Series EE bonds
- Series I bonds
Series EE Bonds
Series EE bonds are fixed-rate bonds that are guaranteed to double after 20 years. They usually pay a fixed interest rate for the bond’s life.
You can sell them at face value, so you pay the bond’s total value upfront, and they mature after 30 years. Although you can redeem them after one year, you will forfeit the last three months of interest if you do so before five years.
Series I Bonds
Series I bonds are inflation-adjusted, meaning the interest rate is adjusted twice per year to keep up with inflation. For example, if inflation rises, the interest rate increases, and the interest rate is adjusted downwards when inflation falls. Series I bonds are sold at face value and mature after 30 years. Like Series EE bonds, you can redeem them after one year, but if you do so before five years, you will forfeit the last three months of interest.
Pros of Savings Bonds
Savings bonds have several features that make them an attractive investment option;
- Low Risk – Savings bonds are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government.
- Guaranteed Return – You are sure of earning a return on savings bonds, so you can easily plan for the future.
- Tax Advantages – The interest earned on savings bonds is exempt from state and local taxes. Besides, if you use them for qualified education expenses, you may be exempted from federal taxes.
- Flexible Terms – Savings bonds are available in different denominations, making it easy to invest according to your budget.
Cons of Savings Bonds
Despite their many advantages, savings bonds do have some cons.
- Low Yield – Savings bonds offer a lower return rate than other investments, including stocks or mutual funds.
- Non-marketable – Savings bonds cannot be sold in the secondary market, meaning you cannot sell them to someone else before they mature.
- Limited Availability – Savings bonds are no longer sold at banks and other financial institutions. You can purchase them online at the TreasuryDirect website or through your tax return.
- Limited amount of bonds to buy per year – you are eligible to buy only up to $10,000 worth of savings bonds per calendar year. This can limit investors who need to invest more money.
How to Buy Savings Bonds
After weighing your options and feel that savings bonds are the suitable investment option for you, you can buy them by following these steps;
- Go to the TreasuryDirect website and create an account (if you don’t have one).
- Select the “BuyDirect” option.
- Choose the bonds you intend to buy (EE or I bond).
- Fill out all the required information, such as your Social Security Number, email address, checking or savings account, etc., to complete the purchase.
- Keep track of your savings bond and redeem it when it reaches maturity.
Savings bonds are a safe investment option for those looking for low-risk investments. They offer guaranteed returns, tax advantages, and flexible terms. However, they have some limitations, such as low yield and limited availability.
If you are stuck on where to invest, contact a financial advisor for advice on the best investment opportunities available.