Originally started as a way to raise money for the U.S. government during the Great Depression, savings bonds have been a popular form of investment ever since. Whether you’re confused about what to do with the ones your grandparents got you decades ago or want to buy a few of your own, they’re thankfully pretty simple to understand if you know where to start.
How bonds work
At the simplest level, savings bonds represent a direct contract between you and the government. You pay the U.S. Treasury any amount between $25 and $10,000, and they issue you a bond. It will slowly mature over a fixed period until it is worth the amount that you paid for it, plus any interest accrued over the years.
If your bond hits its full value before 30 years from its issue date, you can continue to gain interest until it hits that 30-year mark. According to James Chen, Director of Trading and Investing for Investopedia, the way you receive that interest varies depending on the type of bond you hold. Regardless, you can’t use any of that money until you cash in your bond.
Series EE savings bonds
Series EE bonds are probably the most straightforward type of savings bond. They operate on a fixed rate of interest, meaning they will steadily gain value by the same annual amount until their maturity date. Up until 2012, Series EE bonds were sold for half of their face value and would reach their full value at the maturity date, doubling your investment.
Today’s EE bonds are sold at face value and are calculated to reach twice that within 20 years. If your bond doesn’t hit that mark for some reason, financial author and writer for The Balance, Joshua Kennon, says that the U.S. Treasury will “make a one-time adjustment to make up the difference.” You can then choose to cash it in or allow it to accrue compounded interest until it reaches 30 years old.
Series I savings bonds
The biggest difference between Series EE and Series I bonds is the way that they pay interest. As opposed to EE bonds’ lifelong fixed rate, I bonds gain value in two ways: a slightly lower fixed rate and a variable rate calculated based on changes in market inflation.
Because the amount of interest your I bond earns over its life is dependent on the market, they are considered to be a slightly riskier bet than their EE counterparts. According to Kennon, if the market goes through a period of inflation, your interest rate will increase, and you’ll earn money faster. Meanwhile, you run the risk of your bond’s value-gain slowing down dramatically if the economy begins to deflate. As a safety net, the government guarantees that the interest rates on I bonds cannot drop below zero percent, meaning that, unlike other forms of investment, there’s no way for you to lose money on the deal.
While U.S. savings bonds may not make you as much money as betting big in the stock market, they are a stress-free, safe way to grow and diversify your portfolio. To learn more about whether bonds are right for you, reach out to your trusted financial advisor.