Ever wonder how to save some extra money? If you are anything like me you tend to spend your entire paycheck each time it comes in; sometimes before it arrives! My bank offers abysmal interest rates for savings and charges fees enough that the interest rate yield is negative. So how does one get an effective and worthwhile savings plan started with very little capital? One way is to save money with savings bonds.
What are Savings bonds?
Savings bonds are IOUs from the Federal Government of the United States. By purchasing one you own a little piece of the Federal debt and earn interest on your loan to the United States. According to the Treasury website (http://www.ussavingsbonds.gov/indiv/products) “EE bonds are a safe low-risk savings products that pay … a fixed rate of return “and I Bonds are “re a low-risk, liquid savings product.”
What’s the Difference between EE savings Bonds and I savings bonds?
I bonds pay a composite rate of interest. The first component is based on the current inflation rate and is designed to keep your savings ahead of inflation and the second component is a fixed element paying you for your loan. In contrast EE savings bonds purchased after April pay a fixed rate. Another difference is the purchase cost. EE bonds sell at ½ face value while I series savings bonds sell at face value.
How much will I earn if I save using Savings Bonds?
EE bonds currently earn a fixed 3.60% interest rate for bonds purchased through April 2007. Interest is added monthly and paid when the bond is cashed out. I bonds currently earn 4.52% through April 2007. I bond inflation component is re-calculated every May and November. Its fixed component is also announced each May and November but remains the same for the life of the bond. Both EE savings bonds and I bonds earn interest for 30 years.
How long is my money tied up?
One problem many people have in saving money is worrying about whether their funds will be locked away from them. This is not as much an issue when saving money with savings bonds. As we will see later savings bonds have several features that provide a nice alternative to expensive CDs and potential illiquidity sometime suffered by stock holders.
That said, both EE bonds and I bonds act as a poor man’s CD. That is they are a fixed deposit earning interest for a specified period of time. Both types of bond collect interest for thirty years. The agreed upon time in this case is a minimum of one year; exeptions to this rule include natural disaster or other emergencies. After one year you may redeem the bond for its current value less the last three month’s interest payments. Savings bonds held at least five years may be redeemed with no penalty.
So why use Savings Bonds?
Savings Bonds provide an attractive venue for long-term savings having interest rates competitive with many banks CDs and superior to many ‘high-yield’ accounts, but without the high entry cost, minimum balances or account fees. Additionally they enforce savings and can’t burn a hole in your pocket for at least a year after purchase. The interest they earn can be tax-deferred until they are cashed out. Additional tax benefits may be earned by using the proceeds for education.
I series Savings Bonds come in several denominations: $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. EE Bonds are available in the same denominations, but remember that they are purchased at ½ face value. This means you can start and maintain your high-interest savings plan for as little as $25.00! Most other types of accounts may require as much as $500.00 to open and charge you fees if you have less than $1500.00 balance on average. With Savings Bonds you just buy the bond and store it or leave it in your treasury direct (more on this shortly) account.
How Do I Purchase Savings Bonds?
Both types of Savings bonds can be purchased by US citizens at their financial institution or online at www.ussavingsbonds.gov via debit or credit card. A new option is to open a treasury direct account with the US Treasury. Treasury Direct lets you set up an allotment via your direct deposit account, select what kind of savings bonds to purchase, halves the minimum cost of I bonds to $25.00 and allows you to save your loose change in the form of electronic only bonds. Electronic bonds only exist in the treasury direct account and can be any penny denominated value of $25 or more such as $25.53.
Treasury Direct and Savings bonds provides a powerful tool you can use to turn your spare change into valued savings assets. Providing digital access, preventing easy redemption for a fixed period and offering competitive interest rates; saving money with savings bonds make a great nest liner for the Nest Egg you want to have.