
How Do Savings Bonds Work? Savings Bonds Explained
5-minute readSeptember 28, 2020
When you were a child, you probably had that aunt or grandparent who would give you savings bonds for your birthday.
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. Investors purchased bonds and then the U.S. government paid them back with interest after the war was over. Essentially, investors loaned the government money to fight the war, and the government paid them back with interest after the war.
How Do Savings Bonds Work?
Until recently, you would purchase a savings bond for lower than its face value (e.g., a $50.00 bond for $25.00), and you would wait for the bond to mature and then cash it in for its full value. The timeline for the bond to mature was typically 17 to 20 years.
Types Of Savings Bonds
There are two types of savings bonds: EE Savings Bonds and I Savings Bonds. EE Savings Bonds purchased after May 2005, earn a fixed rate of interest for up to 30 years. When you purchase the bond, you know exactly what your fixed interest rate will be.
The U.S. Treasury announces the rate each May 1 and Nov. 1 for new EE bonds. For example, bonds purchased from May 1 through Oct. 31, 2019, will earn an annual rate of return of 0.10%.
The inflation rate is based off of the adjusted Consumer Price Index for All Urban Consumers (aka, the CPI-U), which measures the change in the price of a basket of goods and services purchased by urban consumers.
How To Cash In Savings Bonds
As of 2012, most U.S. savings bond purchase transactions occur online through Treasury Direct.gov. You create an account, enter payment account information and begin buying bonds. You can also buy a savings bond when filing your federal tax return.
If you have a paper bond, you can redeem it at most local financial institutions. You also have the option to cash them in by mailing them to the Treasury Retail Securities Services.
Are Savings Bonds Worth The Investment?
On the surface, savings bonds may seem like the perfect investment. Savings bonds can help consumers protect their money against inflation and supplement their retirement income. However, there are some drawbacks to purchasing savings bonds.
The Bottom Line
With a little research, you may be able to find low-risk investment alternatives that can give you a better rate of return than savings bonds. Savings bonds can be a great addition to a diversified portfolio. They can help you lower your risk exposure and keep some of your money safe.
If you’re unsure about how much you should invest in savings bonds, seek guidance from a financial professional.