With the economy being more dynamic and unpredictable these days, life has become challenging as people try every means possible to make ends meet day after day.
It seems that people always run out of cash no matter what their income is. As a result, consumers are getting more aggressive in exploring new and fresh ways to fatten up their wallets.
One investment option today is the savings bond. But what is a savings bond? How will it help you boost your stash of cash?
What Is a Savings Bond?
A United States savings bond is a type of loan made to the government. By purchasing a savings bond, you will give money to the government, and in exchange, you will receive a guarantee of getting your money back together with interest at a predetermined date later on.
Investing in a US savings bond is one of the good potential investments, especially for new investors or those who are searching for cheap, low-risk, and simple investment options.
The best thing is that you can watch from a distance as your money grows, and you can use that money later on for whatever you need or want, such as retirement.
What Is the Definition of a Savings Bond?
What is a savings bond? By official definition, savings bonds are a form of debt security that the United States Department of the Treasury issues to help pay for the borrowing needs of the US government.
In layman’s terms, savings bonds are an IOU that come from Uncle Sam himself. Once you purchase a savings bond, you will loan money to the government. Upon redeeming it, the government will pay you back together with interest.
Savings bonds in the past were in the form of paper documents that bear serial numbers. These could be bought via mail and at the banks.
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These days, savings bonds should be bought online. However, this is a good thing compared to only being able to purchase paper savings bonds that have predetermined values. These days, this can be done in penny increments.
What Is a Savings Bond Worth After 20 Years?
You can buy savings bonds at face value with a guarantee to double in value once they reach their maturation date. This is generally 30 years for the series I bonds and 20 years for the series EE bonds.
This means that if you are planning to get a series EE bond worth $5,000, you will pay $5,000 at the time of purchase. You can then expect that your money is going to double to $10,000 after 20 years.
Savings bonds can be purchased electronically through the official website of the US Treasury ranging from $25 up to $10,000. There are no longer paper bonds available unless you buy a series I bond using your tax refund.
How Long Does a Savings Bond Take to Mature?
The length of time it takes for a savings bond to mature will depend on the specific type of bond you have.
The more common types of savings bond—the series EE bonds—are bought at a fixed interest rate that will mature after 20 years. During this time, the US government will guarantee that your bond will have already doubled in value.
After the 20 years, the interest rate will be reset with the bond maturing for an additional 10 years.
Despite being exempt from state and local taxes, series EE bonds are still subject to federal income tax.
The second type of savings bonds—series I bonds—are bought at the interest rate calculated by the inflation rate and the existing fixed interest rates. These bonds mature after 30 years.
If there is expected high inflation in the next 30 years, series I bonds are worth considering. Otherwise, your better option will still be series EE bonds as far as maturity is concerned.
What Types of Savings Bonds Can You Buy?
As mentioned above, series I and series EE are the two types of savings bonds you can find right now. Series HH was supposed to be the third type, but it is not sold anymore, although you can still redeem it.
Series I bonds offer inflation protection, which explains what the letter “I” stands for. The returns you get will include the fixed interest rate plus extra earnings depending on the rate of inflation.
You can purchase series I bonds at face value, earning interest for a maximum of 30 years. These are meant to serve as long-term investments. In one calendar year, you have a limit of purchasing I bonds worth $10,000.
On the other hand, series EE bonds, also called “patriot bonds,” can be bought at face value. This means that if you wish to purchase an EE savings bond worth $500, you will need to pay $500 for it.
Series EE bonds issued from May 2005 onward will earn a fixed interest rate for a maximum of 30 years. The older EE savings bonds bought before May 2005 will pay a variable interest rate updated every six months.
Your series EE bonds will earn an accumulated interest that will add to the bond’s face value. Upon redeeming your EE bonds, you will get the complete face value on top of the acquired interest.
How Do Savings Bonds Work?
Purchasing savings bonds is similar to loaning out your cash to a trusted friend who will always pay you back. Here, you will let the government borrow cash for a specific timeframe that can range anywhere from 1 year up to 30 years.
You will be earning interest automatically as time passes, so you can sit back and relax until you are fully prepared to reclaim your money.
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However, it is important to remember that savings bonds will not make you rich overnight. You cannot redeem your bonds at all for one full year.
If you are not willing to wait for a minimum of five years before you collect your money, you will be facing some consequences. The United States Department of Treasury will keep the accumulated interest for the past three months before you took your bond’s funds.
But when five years have passed, you will be in the clear, so you can get your cash anytime you want.
The least amount that can be contributed to a savings bond is $25, and $10,000 is the highest amount that can be chipped in within one year.
How Do You Check or Calculate the Value of a Savings Bond?
There are several details you need to gather to check or calculate the value of a savings bond. These include the following:
- The type of savings bond you got
- The bond’s denomination
- The bond’s issue date
- The bond’s serial number
Once you get these details, you can then use the savings bond calculator to determine the current worth of your bond.
There are two primary websites for calculating or checking the value of a savings bond: treasurydirect.gov, a government website; or savingsbonds.com, a commercial website with an easy-to-use calculator.
How Do You Cash a Savings Bond?
When it is time for you to cash in your savings bond, the process is simple, provided that you have all of the necessary documentation.
Take note that you cannot sell, trade, or give away your savings bonds. The sole person who is allowed to cash them in is the person whose name appears on the bond with a few exceptions.
The first thing you need is your savings bond itself. If you have an electric bond, no process is involved. You just need to cash it via the official Treasury website with the funds deposited straight to your bank account.
However, see to it that your bond is qualified for cashing in. This needs to be at least one year since issuance as there are bonds that only require a retention period of six months.
After that, take your savings bond to the bank where you have had an account for a minimum of six months.
If this is not possible, you can prove your identity with the use of a government-issued photo ID. The most common ID used is a driver’s license.
If you use documentation such as your driver’s license for proving your identity, you will be limited to cash in your savings bonds worth $1,000.
You will then have to sign a payment form request in front of the bank official and confirm your current address and social security number.
Can Someone Else Cash Your Savings Bond?
The parents or guardians of a child who is the bearer of the savings bond are allowed to redeem the bond provided that the child is still too young to sign their name.
In case the bond’s original owner has passed away but there is another person who was named on the savings bond as the beneficiary, that beneficiary is allowed to redeem the savings bond.
Lastly, there are some instances when a person has the legal authority of conducting business on behalf of the bearer of the bond is allowed to redeem the savings bond. It is usually someone who acts on behalf of the estate of the deceased person.
There are also some cases under which the bank can choose to refuse the issuance of payment for the bond or it might even be legally unable to do it.
When such cases happen, the bearer needs to visit the Federal Reserve Bank Savings Bond Processing Site to redeem the savings bond. The locations of such sites can be found at the Treasury Direct website of the US Treasury Department.
When Is the Right Time to Cash in Your Savings Bond?
The right time to cash in your savings bond is once you have owned it for at least a year.
However, if you wish to save yourself from penalties, it would be best for you to wait for five years. Otherwise, you will end up losing the last three months of accrued interest on your bond.
You can expect that your money is going to grow more the longer that you wait before cashing in your savings bonds. Your savings bond will continue growing in value until it reaches its maturity at 30 years.
If your savings bond doesn’t reach the maturity date, it is best that you don’t cash it in unless you are planning to invest the cash into an account that will earn a higher interest rate.
If you wish to learn how your savings bond is growing right now, you can log into TreasuryDirect to check the present value of the electronic savings bond you have. If you have paper bonds, you can use the online savings bond calculator of the US Treasury.
The Bottom Line on Savings Bonds
Now that you know the answer to “What is a savings bond?” you have surely come to realize that buying a savings bond can be one way for you to enter the investment world if you are not the type of person who wants to take on big risks.
Savings bonds can also make ideal gifts for baby showers and weddings.
However, unless you get the series I bond that will adjust according to the rate of inflation, it would be wiser for you to prepare yourself for the possibility that your cash will be returned to you or the recipient of the gift at a much lesser value compared to what you expected.
You also need to keep in mind that bonds can never compete with the usual stocks as far as returns on investment are concerned.