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How Do Savings Bonds Work? Savings Bonds Explained

Andrew Dehan5-minute read
November 11, 2021

As a child, you may have received a savings bond as a gift and felt very annoyed when someone tried to explain to you what it was. Money that you can’t even use right away? That probably seemed pretty disappointing at the time. What’s exciting about $25 that you can’t touch for the next 20 years?

As an adult, however, the idea of a savings bond may not be so disappointing after all. These bonds are more than just monetary gifts you have to wait to cash in – they’re safe investments that earn interest over time. So, what exactly is a savings bond and how does it work? In this guide, we’ll go over all the details, as well as how and where you can get a savings bond yourself.

What Is A Savings Bond?

Savings bonds are bonds issued by the U.S. Treasury that you can purchase either online or at a financial institution and redeem at a later date for their value plus interest. They’ve existed since 1935, when they were introduced by the government as a new type of security to promote saving during the years of the Great Depression.

You can think of a savings bond as a small loan between yourself and the U.S. government where you are the lender. You give the federal government some amount of money right away – say $50 – and get a savings bond in return. If you hold onto that bond for 20 years, it might be worth $100 (or more) when you cash it in.

How Do Savings Bonds Work?

Savings bonds work by accruing interest over time and paying bond owners a fixed rate based on the original principal. This low-risk investment sometimes results in two to three times the profit of the original buying price.

Traditionally, you would buy a savings bond for a price lower than its “face value” ($25 for a $50 bond, for example) and then you would have to wait around 17 – 20 years for the bond to “mature,” or grow to its full value and stop accruing interest. Today, however, you can buy savings bonds in paper or electronic form for their face value and cash them in at any time after an initial 12-month period. They accrue interest until you cash them in or up to the 30-year maximum limit.

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Types Of Savings Bonds

There are two different types of savings bonds: EE Savings Bonds and I Savings Bonds. I bonds can be purchased as either paper savings bonds or electronic savings bonds, while EE bonds are now available only electronically.

Let’s go over the key differences between these two types of savings bond.

Series EE Bonds

Series EE bonds (also sometimes called Patriot Bonds) have a fixed rate of interest, meaning that when you buy them, you’ll know the interest rate that they will earn throughout the life of the bond. EE Bonds purchased between November 2021 – April 2022, for example, will earn an annual fixed interest rate of 0.10%.

These bonds are guaranteed to at least double in value during the initial 20 years of their term. They’re subject to federal taxes, but only in the year you eventually redeem them. Currently, these bonds can only be purchased electronically on the U.S. Treasury’s website.

I Savings Bonds

Series I bonds accumulate value by combining a fixed rate with the rate of inflation. These bonds also earn a fixed rate of interest – 7.12% for bonds purchased between November 2021 and April 2022 – but also adjust for inflation twice a year. As of September 2021, the U.S. rate of inflation was 5.4%, which means that the actual rate of return at this time is around 1.72%.

Though these bonds are essentially “low-risk, low-reward,” their purpose is to save money that’s protected from inflation. You can buy them in paper or electronic format through the U.S. Treasury.

How To Buy Savings Bonds

Savings bonds are no longer sold at banks – so if you want to buy them, you’ll have to do so through the U.S. Treasury. You can purchase paper Series I bonds when you file your IRS tax return if you’d like paper bonds to give as gifts – otherwise, you can buy Series I and Series EE bonds on the U.S. TreasuryDirect website.

The minimum investment for electronic Series EE and I bonds is $25. If you choose to get a paper I bond, the minimum investment is $50.

How To Cash In Savings Bonds

Cashing in your savings bond is a fairly simple process. If you own electronic bonds, you can log into TreasuryDirect and follow the instructions for redeeming your bond. If you own a paper bond, you can cash it at most banks and financial institutions – you may want to call ahead before attempting to do so, however, to make sure that the place you intend to cash your bond still offers that service.

You can also cash your paper bonds directly through U.S. Treasury Retail Security Services. If you choose to go that route, you’ll need to fill out FS Form 1522 and mail the bonds and that form to Treasury Retail Securities Services, PO Box 214, Minneapolis, MN 55480-0214.

Keep in mind that you must hold savings bonds for a minimum of 1 year before you’re able to cash them in. Additionally, if you cash them in before the first 5 years, you may lose the last 3 months of interest accrued. For example, if you redeem your savings bond after 18 months, you will only receive 15 months of interest.

Savings Bonds FAQ

Still confused about savings bonds? Here are a few frequently asked questions to help clarify these bonds and what they do.

Are savings bonds worth the investment?

Whether anything is worth the investment is entirely up to you – but savings bonds, as far as investments go, are a pretty safe bet. They can help you protect some of your savings from inflation and can supplement your retirement income. Like any other investment, however, there are drawbacks to savings bonds, too.

The biggest problem with savings bonds is that the return on your investment will be minimal. While they are much safer in terms of potential loss, bonds don’t bring in the returns you could earn by investing in something riskier like the stock market. You probably shouldn’t rely on savings bonds alone when planning your retirement savings.

Do savings bonds accrue interest?

Savings bonds do accrue interest over time based on either a fixed annual interest rate or a fixed interest rate and rate of inflation, if you’re buying Series I bonds.

How long does it take a savings bond to mature?

To get the most out of a savings bond, you may wish to wait for it to “mature,” or reach its full promised monetary value. The maturation date of a savings bond is the day that the government, who you lent the money to, promises to pay you back double what you gave them originally. Maturation dates depend on when you purchased your bond, but they are usually anywhere from 17 – 20 years in the future. If you bought a $50 savings bond in November 2021, you could theoretically cash it out for $100 (potentially more, depending on interest earnings) in November 2041.

The Bottom Line

Savings bonds are a useful way to protect your earnings from inflation and set aside money to support your retirement. Though these investments are typically fairly low-yield and low risk, they are an excellent way to diversify your financial portfolio and set yourself up for success.

To learn more about different investments and personal finance topics, check out the Rocket HQ℠ Learning Center.

Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.