advantages of savings bonds
Finance

The Advantages of Savings Bonds

Investing has entered the mainstream. It’s no longer the reserve of the super wealthy or the finance nerds. Nowadays, investing can be done by anyone using an app or an online service. This has brought some benefits but the popularity has masked the risks for a lot of new investors.

Outside of investing in real estate or trading stocks, most people have a limited knowledge of the investing options available to them. In fact, most of the financial and accounting sector is poorly understood, which can lead to many people making bad financial decisions.

Savings bonds are a traditional form of investment that are often overlooked because they don’t have any hype surrounding them.

So, what exactly are savings bonds? This article will walk you through the basics of savings bonds. Then we’ll discuss the advantages of investing in savings bonds over other forms of investment.

What are they?

Savings bonds, essentially, are loans. Usually banks or financial institutions loan money to individuals but in the case of savings bonds, the individual is the one doing the lending. When you buy a savings bond, you are basically giving the government a loan with the understanding that you will earn interest on it.

In the United States, there are two kinds of savings bonds: Series EE and Series I. Series EE bonds have a fixed interest rate and the government guarantees that they will double in value after 20 years. Series I bonds have a combined interest rate – both fixed and inflation-adjusted. The inflation-adjusted interest rate means that if inflation spikes, your investment is still protected.

Savings bonds are a long-term investment. After five years, they can be redeemed without any penalty. However, they can be withdrawn after only one year, with only a small penalty being applied.

It is generally considered a better investment to hold on to them for longer than that, since they continue to accrue interest for 30 years after the date that they are issued.

What is it that sets savings bonds apart from other types of investment? Here are some of the main advantages of investing in savings bonds instead of more volatile markets:

Lower risk

Savings bonds are a government investment. This means that they are much better protected than many other investment types. They are fully protected by the FDIC, which is hugely important for your peace of mind.

In addition, savings bonds are not at the mercy of the market. Since the 2008 financial crash, we’ve seen just how dramatically the stock market can fluctuate. Unlike normal stocks, whose value can be completely wiped out in a crash, savings bonds carry a much lower risk and slowly grow interest over time.

Low buy-in

One of the main reasons that people don’t invest is that they don’t believe that they have enough money to do it. This isn’t the case with savings bonds. In the case of Series EE and Series I bonds, they can be purchased for as little as $25. While you will obviously see greater returns with a larger investment, starting small is ideal for most people. It allows you to get your foot in the door with investing, without a serious risk.

Easy to purchase and redeem

In the days before the internet, you had to go to the bank to purchase a savings bond. They are under the control of the federal government so they can only be purchased through official channels.

Thankfully, it is now possible to buy savings bonds online. The US Treasury has a dedicated website for purchasing and redeeming savings bonds. It is a simple process, though it does require you to set up a dedicated account. They also make it possible to purchase savings bonds as gifts for other people.

The other way in which savings bonds can be purchased is through an employer payroll savings plan that directly deposits an amount into your savings bond account.

If the thought of a paper savings bond appeals to you for a nostalgic reason, it is still possible to purchase them – you simply need to use your IRS tax refund and follow their process.

Tax status

Taxes on investments can seriously eat into any profits that you’re earning. One of the advantages of savings bonds is that you do not have to pay taxes on the interest payments. The only time that savings bonds are taxable is when they are redeemed. Keep in mind that this is true for United States savings bonds but could be different in other countries.

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