Savings Bonds #
| Yield | Liquidity |
|---|---|
| Medium | Low |
TLDR: Savings bonds are an excellent way to save money, as long as don’t need the money for some time. Their yield far outpaces other financial tools for saving money, including High Yield Savings Accounts, while also having basically no risk.
A bond is an IOU issued by the government (or some other entity) to a lender (you). This IOU comes with conditions such as a guaranteed rate of interest and a date at which it will be paid back (maturity date).
By buying bonds, you can lock in interest rates higher than offered by banks with the same level of risk (the federal government guarantees repayment).
Kinds of Bonds #
There are several different kinds of bonds1. However, the kind that is most applicable to you (an individual investor) are savings bonds.
Savings bonds are bonds issued by the government for individual investors. You can purchase them in small lots (the current minimum lot size is $25), with the same perks offered by normal Treasury Bonds.
It is important to note that there is a maximum lot size that can be purchased in any given calendar year. As such, if you have a large amount of savings, you may not be able to put all of it into savings bonds. View the Treasury website for more information.
There’s two types of Savings Bonds.
I Bond #
The I Bond is a type of savings bond whose rate of interest is tied to the rate of inflation. Its interest rate changes every 6 months to be pegged to the current inflation rate. This means that your money is guaranteed not to depreciate due to inflation. As such, this is a fantastic way to save money.
EE Bond #
The EE Bond is a type of savings bond with a fixed rate of interest.
It is noteworthy that if you hold onto an EE bond for 20 years, your money will be doubled, regardless of the initial fixed interest rate. This works out to an interest rate of around 3.6%, significantly better than a bank’s interest rate, and slightly greater than historical inflation averages of 3.2%.
Further Reading/ Links #
- https://www.investopedia.com/terms/b/bond.asp
- https://www.thebalance.com/what-are-the-different-types-of-bonds-3305600
- https://treasurydirect.gov/
- Government website for buying Treasury bonds
- https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm