Having “The Talk” About Making Your Money Work Harder: Part 2 – Savings Bonds
Welcome back to our five part series on making your money work harder! If you remember, this series is part of a BIG conversation I had with J where we talked about other ways to invest his money beyond the Bank of Mom.
In part 1, we talked about savings accounts and now here’s a recap of our conversation on savings bonds.
What Are (Savings) Bonds?
In the most simple language possible, I tried to explain that a savings bond is a loan that you make to the government. You buy the bond, and the government uses the money now. After time passes (up to 30 years), you get your money back PLUS interest.
To be a little more technical:
“U.S. savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.” – Wikipedia
“Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.” – Wikipedia
See the interest rates and terms for EE bonds (a very common type of savings bond). You’ll also find information on when the bond earns interest and any penalties for cashing the bond in early.
In the Past
Savings bonds were a BIG part of my financial education. I’ve talked a little bit about this before.
When I was young(er), I received savings bonds as gifts and was also required to purchase them myself with money I earned or received. (Thanks, Dad.)
I think buying savings bonds was a common thing to do at the time (30+ years ago), maybe because…
- People understood that saving money was important!
- They wanted to help the government (check out these awesome posters and TV commercials)
- The interest rate was pretty good
- They were safe investments and virtually risk free
- People could gift something to someone that would be worth more later, perhaps when it was time to go to college, get married or buy a house
My Savings Bonds
A few years ago when one of my first bonds matured, I took it to the bank to cash it out. I had always assumed that you received the face value, and I was shocked to learn how much more they were worth! (I never really understood — for paper bonds, you paid half the face value. For example, $50 for a $100 bond. But if it earns interest for 30 years, it’s worth WAY more than $100. So what does the $100 mean??)
After I started looking at my money in a big picture sort of way, I ran the calculator to get the current value of my stack of bonds. (You can save the inventory and open the file each month to see the new, recalculated value as of the current month.)
I showed J some of the paper bonds that I had, then showed him how much they were worth. Most of mine are earning 4% interest. Earlier this year, I cashed out a few earning 1% and split the proceeds between my Roth IRA and J’s college fund.
J’s Savings Bonds
Even though my bonds are earning 4% interest, the current interest rate is 0.10%. UGH! That means we won’t be buying any bonds as part of our strategy for making our money work harder.
However, during our talk, I remembered that J had received some bonds when he was a baby. (He was born in 2008, and they stopped selling paper bonds in 2012.) I dug them out and found that he actually had 10 total!
We looked them up online and the value is over $700. Nine are earning 1.4% interest and one is earning 1.1%.
These aren’t amazing rates, but they’re something. For now, we will keep them as part of our diversified portfolio:
- Savings (from Mom, at our local bank and at our online bank — detailed here and here)
- Savings Bonds
- 529 (college fund)
- And hopefully once J gets his first job, the family 401k
Eventually we’ll talk more about bonds as part of an investment profile, so keeping these will be a good lead in to that conversation. Bonds play a part in lazy and three-fund portfolios as well as target date retirement funds.
What about you? Do you, too, have a stack of bonds from your childhood?