How does savings bond work
US Savings Bonds Explained
When you were a child, you probably had that aunt or grandparent who would give you savings bonds for your birthday.
“Oh boy!” you would think to yourself as you opened up that birthday card and saw what looked vaguely like money, but with a picture of Thomas Jefferson on it. “I’m going to go buy a rad new Nintendo game, or maybe a Super Soaker!”
Not so fast, hotshot. Aunt Eunice bought you a $50 savings bond. It won’t be worth $50 for probably 10–18 years depending on the average 5-year Treasury yield for the 6 months prior to when she bought it. All you need to know is that good old Eunice paid $25 for something that will be worth as much as a nice dinner when you’re in college.
Savings bonds are still available these days, though gone are the days when you could purchase them from your local bank. Before we discuss the value of savings bonds as part of your financial picture, let’s make sure we all understand exactly what they are.
What Exactly Is a Savings Bond?
Perhaps you’ve heard of Liberty Bonds? They were originally intended to help the United States finance World War I. Basically, you purchased a bond and then the U.S. government would pay you back with interest after the war was over. In essence, you were loaning the government money to fight the war, and the government would pay you back with interest after the war.
Savings bonds are a long-term savings instrument intended to be a lower-risk alternative or compliment to more potentially-perilous investments like stocks. There is virtually no risk when purchasing savings bonds. You’re essentially investing in the United States of America. As long as the United States Treasury keeps paying its bills, you’ll keep accruing interest. But in exchange for that security, bond buyers get a low rate of return.
How Do Savings Bonds Work?
Until recently, you would purchase a savings bond for lower
than the face value (e.g. a $50 bond for $25), and you would wait for the bond to mature and then cash it in for the full value, typically 20 years.
Now, savings bonds are purchased for the full value and accrue interest until you cash them in. Interest is earned monthly and is compounded semi-annually for a period of up to 30 years. But you do have to wait a period of at least 12 months before you cash them in. The longer you hold on to a savings bond (up to a maximum of 30 years), the more it is worth when you finally cash in.
Bonds purchased today will earn a fixed rate of return for as long as you have them. Right now, the rate of return on a Series EE/E Savings Bond is 0.10%
As of 2012, all U.S. savings bonds are purchased online, through Treasury Direct. You create an account, enter payment account information and begin buying bonds. Bonds can then be sold using the same tool whenever you’re ready.
What Are Savings Bonds Good For?
If you don’t like the idea of losing your hard-earned money in the stock market, bonds are a great way to guard against losses. They can also be a convenient way to save for future educational expenses.
But, frankly, savings bonds aren’t going to make you a lot of money in the form of returns on your investment. The current 0.10% rate is about 4 times lower than the current rate offered on savings accounts.
As the economy improves, these rates will likely increase, making it somewhat more attractive. But U.S. savings bonds are safe alternatives, and you pay for that safety in the form of low returns.
No knock on their value in today’s diversified savings plan, but savings bonds are kind of boring. If you’re looking for a more exciting savings alternative, check out one of these options. Are you a risk taker? Does the thought of high returns outweigh the potential for losses in your mind? Check out some of these savings alternatives for more risk-tolerant people.Source: www.quickenloans.com
Category: Personal Finance