Banking on tomorrow with savings bonds

How does a savings bond work?

It’s not a new idea, but it is one that’s endured. A savings bond is proof that you’ve lent money to the government itself. The government then pays your investment back to you over time, with interest, and at a fixed rate. Commonly bought at values from $25 to $500, they can be purchased at values up to $10,000. You can get savings bonds directly from the U.S. Treasury website.

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The return of a savings bond isn’t as dramatic or exciting as a sudden rise in the stock market. Instead, a savings bond is slow and steady: It may take 20 years for one to double in value upon maturity, while it takes an additional 10 years for bonds to reach their full maximum value. But the fact that savings bonds are safe is their main attraction. Backed by the Treasury, they’re guaranteed to double in value, and decades-old bonds are still being honored even if they’re no longer sold. When you cash out a savings bond, you’ll avoid state and local taxes—another compelling advantage.

Perhaps you once received a savings bond from a family member for a birthday; because they’re so stable, they’re great for first-time investors. Savings bonds have fallen out of favor for recent generations of savers, but after the last few economic upheavals and in the face of inflation, they’re beginning to gain attention again.

Savings bonds can be good for you and the economy

The government issues bonds whenever it needs to rely on the general public to help kickstart funding. During the World Wars, for example, the government leaned heavily on the sale of Liberty Bonds to be able to pay for the ongoing war effort. And throughout the decades, American families have relied on bonds to pay for higher education, which has also led to tax deductions and exemptions.

While a savings bond does cause some growth of the national debt, it also encourages the government to spend more, which is a healthy way to stimulate the economy. You can cash out on a bond any time, and the government must honor the bond as a contract (though there is a penalty if you cash out before five years).

Types of savings bonds

Today the government offers two types of bonds:

• EE Bonds. With a fixed rate of interest that is earned monthly, EE bonds are guaranteed to double after 20 years. They are only sold electronically, after the Treasury discontinued paper bonds in 2011 (saving, by some accounts, an estimated $120 million per year from paper processing and mailing).
• I Bonds: These bonds earn two types of interest: a fixed rate like the EE bond, and a rate that is tied to inflation. This inflation rate is adjusted every six months. I bonds are also available in paper form, but only when purchased with a tax refund.

The I Bond is making an impact today because its current composite rate is around 7%, which is close to the average stock market level of a 10% return on investment—only without the risk. Both I and EE bonds have different returns based on when you begin investing, how much you invest, and when you cash out.

How to use savings bonds

There are two factors that will determine an ideal time to buy a savings bond. The first is inflation, which is more tied to I bonds; here, during times of high inflation, having that value tied to your investment can lead to a higher return. The second is the new rates announced every six months by the Treasury, which come during April and October. Future rates can be predicted, and since they’re locked in, it’s wise to compare and aim for the higher rate.

The unexpected can happen, and you might need to cash out of a bond earlier than you anticipate. Here lies the disadvantage of savings bonds: because they offer returns at far lower rates than stocks and other forms of investments, waiting for two or three decades might not seem enticing to investors. But because they’re guaranteed to accrue any value, they can seem like extra money to be set aside in case of emergencies: even if you are penalized for cashing out early, having that money on hand can eliminate debts, pay off loans, or act in an emergency.

You can look up how much your bond is worth via the U.S. Treasury website, which will also give you details on how much money you’ve earned so far, and how much you initially invested. These factors will be important to determining whether your bond is earning enough interest to be worth holding onto.

It’s because of these guarantees and this stability that this time-honored investment method is a savvy way to take control of your finances during turbulent times. Read about more finance and budgeting tips from Microsoft 365.