What are the pros and cons of savings bonds?
March 17, 2009 by How Savings Bonds Work
Filed under More Bonds Answers
Can you answer Sketchy’s question about Bonds?:
I’m thinking about getting a couple savings bonds because I have quite a bit of money just sitting in my bank account. Can anyone tell me how these things work and the pros and cons of them?
I have time believe me. I’m 18. I don’t plan on cashing them until maybe retirement.
High Yield Corporate Bonds
I’m thinking about getting a couple savings bonds because I have quite a bit of money just sitting in my bank account. Can anyone tell me how these things work and the pros and cons of them?
I have time believe me. I’m 18. I don’t plan on cashing them until maybe retirement.
High Yield Corporate Bonds
Bonds Feedback: I don’t recommend them. You have to wait forever for them to be worth anything.
Find a good broker and invest in mutual funds. I’ve made an average of 18 to 20% on my investments over the last 7 years. The market has been incredible.
If you’re young, you could retire a millionaire by just putting a little into the market every week.
Bonds Feedback: Savings bonds may be patriotic but they are a horrible investment. The very first thing you need to is establish an IRA. Individual Retirement Accounts are part of the tax code and allow you to invest money PRE TAX. For example: If you make $30,000 a year and you invest $2,000 in an IRA, then you only pay income taxes on $28,000. The IRA money is what is referred to as “qualified” money. So you have not only ivested the $2,000 but you also will pay less income tax. Everyone can get an IRA. The actual investment that you use for the IRA can be almost anything; Stocks, bonds, mutual funds etc. Also, mutual funds are still the best deal going hands down. A mutual fund is simply investing in several individual stocks all at one. The stock market is a proven winner and in fact over ANY 20 year period (including the Great Depression) the stock market has shown significant gains. So find a GOOD, low cost mutual fund, max out your IRA and LEAVE IT ALONE! Also if you work for a company who has a 401k then make sure you participate. A 401K is a lot like an IRA, but it’s a work related program that basically works the same way as you IRA.
Bonds Feedback: I too have saving bonds, cant really see anything good about investing in saving bonds The return is low and it takes forever to make any money on them. But like you I have extra money from my check, so I buy one every few pay periods and put them in my desk. They are fun to look at, but thats about it.
Bonds Feedback: Good secured investment
reliable
but
low returns as compare to other investments
so
Good to have 5-10% savings in bonds and other in risky but high return investment like equity, MF
Bonds Feedback: We are living in a period of high inflation here in the USA and inflation is going to eat all of your real returns. Have you seen gas, housing, or food prices recently!!! If those bonds pay 3.5% and inflation is 4% you’re really losing 0.5% every year, of course the numbers in your account will grow, but the purchasing power of your dollars in your account has eroded.
P.S. Good to see saving at such a young age. As Einstein said, compound interest is the most powerful force in the universe.
Bonds Feedback: I believe Savings Bonds are a good investment if you understand their drawbacks.
Savings Bonds are a low risk investment, thus they will yield low returns. The returns are typically better than a standard savings account, but usually not quite as good as a Money Market Account.
I personally have Savings Bonds in my portfolio. There are two kinds, Series EE and Series I. Which one is better requires some speculation.
Series EE are purchased at half of their face value (a $100 bond costs $50) and earned a fixed rate of interest. The bonds will mature in 20 years (this means that in 20 years, the bond at minimum will be work the face value…$100 in the example I used…if interest rates are so low that the bond doesn’t double in 20 years, you’ll be given a one time interest payment so that you will get the face value).
Series I pay a set interest rate plus a variable interest rate tied to the inflation index. A $50 I bond costs $50. There are no guarantees as to how much the bond will be worth down the road. You are simply guaranteed a set amount of interest plus an inflation adjustment.
So what are the pros about bonds?
1. They are backed by the full faith and credit of the US government. As long as there is a US government, they will pay on the bond.
2. They are a liquid asset that can be cashed anywhere. You can pretty much walk into any bank with a savings bond and walk out with cash in a matter of 10 minutes.
3. The I series bonds are a good hedge against inflation. You know that the $100 you used to purchase the bond will have the same buying power when you cash it in 20 years from now since you are given money to couteract inflation. This can be nice if you anticipate another Carter-era inflation period.
4. They can not be taxed by the state government, which can be important if you live in a state with high tax rates. They can also qualify for total tax excemption on the interest in certain circumstances.
Cons:
1. They are a poor paying investment. You can do much better with safer investments such as a money market account. or by investing in a short-term investment grade bond fund. Both accounts are nearly as liquid as savings bonds (typically you could write a check from either account). However, this is a HUGE problem with Savings bonds.
2. They can not be cashed for 1 year and have a 3 month interest penalty if cashed within 5 years.
3. While long-term tresurery rates have not reflected any loss of faith in the US government’s credit, it is conceivable that if overspending is not curbed by Congress, people may begin to cash in US Treasury debt, causing interest rates to spiral out of control, making a Series EE bond pretty much worthless.
Most Personal Finance advisors will suggest that you have 3 to 12 months of your take home pay in cash to cover disasters. I keep about 6 months worth of pay in Savings Bonds to use strictly for an emergency fund.
Currently, with interest rates as low as they are, I wouldn’t recommend investing in Savings bonds right now as the interest rate doesn’t change once you buy them.
I would recommend spreading some money across a few mutual funds. Bonds funds tend to gain and lose value inversely with interest rates on the shorter term (as rates go down, bond funds tend to go up and vice versa). On the long term, bond funds, like stocks, have so many variables involved that they can gain or lose money for seemingly no reason. As a rule of thumb, the shorter the bond maturity length and the higher the debt raiting, the safer the investment and the smaller the return.
Throw some more money into a stock mutual fund. Research the funds well. If you are young, stock funds are a great investment and will pay much more than investing in debt. You just have to be prepared to ride out the highs and the lows.
Good Luck. I hoped this helped.