Should I Invest in Savings Bonds?

Author: | Posted in Bond Investing No comments

Should I Invest in Savings Bonds?

Many Americans purchase savings bonds each year. Some utilize payroll savings plans that come out of their check automatically, and some are little old grandmas who buy bonds for their grandchildren’s birthdays.

But you are the savvy investor and you want to know if it’s worth your time – and more importantly – your money!

Currently your options for purchase are series EE bonds or series I bonds. Although the bonds have some similarities, the primary differences are in the way the interest rate is determined and the amount of purchase price.

The “double E” is the standard bond that has been around for years. Series EE bonds purchased after May 2005 earn a fixed rate of interest. The current 6-month period is 3.4% through October 2007. The I series began a few years ago and is a combination of rates. According to the www.ussavingsbonds.gov website the interest rate is “Calculated as earning a fixed rate of return and a semiannual inflation rated based on CPI-U.” Current interest on I bonds through October 2007 is 3.74%.

Series EE bonds are purchased at half the face value. For instance, a $50 bond will cost you $25. This is the smallest investment option. While an I Series bond is purchased for the full face value. For instance, a $50 bond costs $50.

Many people get caught up in the “face value” terminology. The fact is both earn interest for thirty years and are eligible for cashing after one year. Although EE bonds will reach face value at some point during the 30 years, it doesn’t change anything about the bond. The I Bond doesn’t reach “face value” because it is purchased at face value. Double E bonds are guaranteed to reach face value in a maximum of twenty years, regardless of the interest rate. Both incur a 3-month penalty for cashing prior to 5 years.

When purchasing bonds you do not get credit for the day of the month you purchase them, only the month. So, use your money until the last day of the month you wish to purchase the bond. You will earn the same amount of interest for that month as if you had purchased it on the 1st.

What about bonds for education? Should I buy some for my granddaughter to help save for college? That is an option. However, if you’re planning on your son being able to take the Education Credit for the interest earned, you need to be sure to purchase the bonds in the name of the taxpayer that is 24 years old or older at the time of issuance. That means, you should purchase the bonds in the name of the child’s parent. The tax credit does not apply if the bonds are in the child’s name. Also, remember that EE bonds during this period (through October 2007) are earning a fixed rate of 3.4%. It will take a lot of bonds to pay for college! However, investing in something is better than doing nothing.

In a not-so-official test, I pretended that I had invested the same amount of money in an I bond and also an EE Bond. In every example I tried, the I bond out performed the EE bond. Try for yourself using the savings bond calculator http://www.treasurydirect.gov/BC/SBCPrice. For this reason, I advise purchasing an I bond if you decide that bonds are your investment vehicle.

What do you need to purchase a savings bond? The name of the owner, the address you want the bond mailed to, the owner’s social security number, a co-owner or beneficiary’s name if desired. You may purchase savings bonds online or at most financial institutions. It takes about two to three weeks to receive the actual bond via the U.S. Post Office. The government also offers an electronic option that alleviates the necessity of paper documents. Your bonds are documented in an online account that can be viewed and managed via the internet. Paper bonds that you already own can be converted to this online option.

Bonds are a safe investment. However, you sacrifice a higher return on your money by settling for a little peace of mind.