U.S. savings bonds are a conservative investment where you loan money to the federal government. When the bond matures, it will be paid back in full, plus interest.
What is a savings bond?
Savings bonds are a type of investment where you are basically lending money to the United States federal government. The conservative investment is a great addition to your investment portfolio and should be a part of your financial planning for the future. The U.S. Treasury Department issues these bonds with the guarantee that the bond will be paid back and earn interest over a set period of time.
A bond that is purchased will reach full maturity when it is no longer earning interest. When you cash out a mature bond, the government will pay interest on top of the principal balance. Hold the bond in a safe place until it fully matures to get the most out of your investment. Your compensation may be impacted if you cash out early, with the loss of interest payments and additional fees, depending on the type of bond.
Types of government savings bonds
Series EE savings bonds
These bonds were first introduced in 1980. What is interesting about ee bonds that are issued is that they are guaranteed to double the principal amount when they are held for at least 20 years. Any bond of this type purchased after 2005 will have a fixed rate of interest until they fully mature.
Municipal bonds
Municipal bonds work a little bit differently than federally-issued bonds. Instead, these bonds are issued by either your state or local government to fund day-to-day operations or pay for large projects.
The interest these loans earn is usually not required to be claimed on your taxes as part of your income. In addition, they receive regular interest payments at a set interval.
I bonds
Series I savings bonds was first introduced in 1998. They use a combination of a fixed interest rate with one that is adjusted based on the inflation rate. These bonds can accrue interest for up to 30 years.
How much will a savings bond increase?
In all honesty, the only way to answer this question is that it depends. Check in to see what the interest rate was set at when you first purchase the loan, as that should give you an idea of how much your bond will increase in value.
However, this investment type is a very secure, safe option. This means that they will not reap the same financial gains as riskier investment opportunities, such as stocks.
Advantages of investing in paper bonds
Bonds are a low-risk way to make an investment, because of this, they do not offer the same return as higher-risk investments. Outlined below are the main advantages to investing in government bonds:
- You are guaranteed to get your money back, plus the additional interest earned.
- Federal-issued bonds are not subject to state or local taxes. In addition, they can be tax-deferred until the bond is cashed.
- Many bonds used for education may qualify for a tax break.
- Bonds are sold at face value
- Minors can hold this type of investment in their own name.
- It supports the U.S. government
Cons of bonds
- Low risk, also means low reward.
- To get the maximum amount back, you have to hold the bond for a long time; perhaps decades.
- Cashed in bonds are eligible to be taxed by the federal government as a source of income.
Using a savings bond
When it’s time to cash out, all you need to do is head to your nearest financial institution, such as a bank. In fact, most financial institutions will redeem your paper bonds. Electronic bonds need to be cashed online at TreasuryDirect.gov. When they are cashed online, they will be deposited directly into your bank account.
In summary
Savings bonds are often the first type of investment people interact within their lives, most often as children. Bonds have been around for a long time.
Although they offer low returns, a U.S. savings bond offers guaranteed returns. Bonds have almost no risk to you, the only thing you have to do after buying a bond is to wait. If you have the time to wait and want more secure options in your savings portfolio, a bond might be for you. If you have credit challenges, Cambio can help you repair your credit.
