Savings bonds are a simple savings product offered by the U.S. government to help people save money. Here’s a brief look at the role they’ve played in our nation’s history, plus some insight on savings bonds today.
You may remember the term “savings bonds” from a simpler time in your life. Chalk boards. Text books. Teenagers. Yup, we’re talking about high school history class. Savings bonds played an important role in America’s 20th century, and they’re still used today. Let’s brush up on our U.S. history before exploring whether savings bonds are right for you.
Heading back to history class
Savings bonds were first signed into legislation by Franklin D. Roosevelt to help Americans save money during the Great Depression. Amid economic crisis, people liked that saving bonds were a safe long-term investment. Because they are backed by the full faith and credit of the U.S. government, people knew they wouldn’t lose out if the economy dipped.
When you purchase a savings bond, you are essentially providing a loan to an entity – such as the U.S. government. Like with an IOU, the government agrees to pay you back later with interest. This made savings bonds an effective way for the government to raise funds during World War II. By the 60s and 70s, families liked to buy savings bonds to pay for higher education. They became even more popular in the 1990s when Congress created tax exemptions for bonds used to pay tuition.
Savings bonds today
Nowadays, savings bonds operate in much the same way. You still provide a loan to the government at very low risk. But now, bonds are sold primarily online through TreasuryDirect.gov instead of with paper certificates you can hide beneath your bed.
Bonds remain a safe, easy way to save and earn money over time. The Treasury guarantees to not only pay you back – but to double your initial investment over 20 years. Pretend you purchased a bond for $10,000 in 2020. By 2040, your bond will be worth at least $20,000 thanks to compounding interest payments from the government. After that, you can continue accruing interest for another 10 years. And bonus! When you redeem your bond, the money won’t be subject to state or local taxes. You may also enjoy federal tax deductions if you use your bond to fund higher education at an eligible intuition.
Types of bonds
There are two types of bonds to choose from: Series EE bonds and Series I bonds.
Both earn monthly interest and can be purchased online in any amount from $25 to $10,000. However, the Series EE bond offers predictable fixed rates while the Series I bond has both a fixed-rate and a variable rate component. Your earnings will fluctuate based on inflation with the Series I.
Compare these bonds on the Treasury website.
Do bonds make sense for you?
How do savings bonds compare to other savings vehicles? And, more importantly, are they the right choice for your needs? Traditional savingsand money market accounts allow you to earn interest and access your money right when you need it. Bonds, on the other hand, grow slowly in value and are worth the most after 20 to 30 years.
Consider savings bonds for your long-term savings goals. You can set money aside to earn interest, while resisting temptation to dip into your funds. But don’t rush into buying a bond. Today there are many saving vehicles designed for long-term saving – each with unique pros and cons. If you’re saving for education or retirement, Roth IRA and 529 accounts are popular options to explore. And they may offer better tax deductions or a higher Annual Percentage Yield (APY) than a savings bond.
Inspired to start saving? Explore these 9 simple ways to save.
As a financial expert with a deep understanding of savings products and investments, let's delve into the concepts mentioned in the article about U.S. savings bonds.
Historical Significance: Savings bonds have a rich history dating back to the Great Depression when Franklin D. Roosevelt introduced them as a legislative measure to aid Americans during economic hardship. The historical context is crucial, as the bonds served as a safe, long-term investment backed by the full faith and credit of the U.S. government. This security was particularly attractive during times of economic uncertainty, such as the Great Depression and World War II.
Government Backing and Purpose: The core concept of savings bonds lies in individuals providing a loan to an entity, in this case, the U.S. government. Similar to an IOU, the government commits to repaying the bondholder later with interest. This mechanism allowed the government to raise funds effectively, especially during periods of war. The assurance that the investment was secure and backed by the government's credit became a hallmark of savings bonds.
Evolution Over Time: Savings bonds have evolved over the years. Originally, families in the 60s and 70s turned to savings bonds to finance higher education. Notably, in the 1990s, Congress introduced tax exemptions for bonds used to pay tuition, further enhancing their appeal.
Contemporary Usage: In the present day, savings bonds continue to be a secure investment option. The article emphasizes the shift from paper certificates to online platforms like TreasuryDirect.gov for bond transactions. The government still guarantees repayment, and the bonds remain a safe and accessible way for individuals to save money. The assurance of doubling the initial investment over 20 years and the tax benefits associated with redeeming the bond are highlighted as key features.
Types of Bonds: Two main types of savings bonds are discussed: Series EE bonds and Series I bonds. Both types earn monthly interest and can be purchased online in varying amounts. Series EE bonds offer fixed rates, providing predictability, while Series I bonds incorporate both fixed and variable components, with earnings fluctuating based on inflation.
Comparison with Other Savings Vehicles: The article encourages readers to consider whether savings bonds align with their financial goals. It distinguishes between traditional savings and money market accounts, which provide immediate access to funds, and bonds, which grow in value over a more extended period. The recommendation is to view savings bonds as suitable for long-term savings goals, resisting the temptation to withdraw funds prematurely.
Consideration of Alternatives: The article suggests that individuals explore various long-term saving options, mentioning Roth IRAs and 529 accounts as alternatives. It advises readers to assess each option's pros and cons, considering factors such as tax deductions and Annual Percentage Yield (APY) before deciding if savings bonds are the best choice for their specific needs.
In conclusion, the information provided in the article serves as a comprehensive guide to the history, mechanisms, and contemporary relevance of U.S. savings bonds. It not only educates readers about the roots of these bonds but also equips them with knowledge to evaluate whether savings bonds align with their financial objectives in the context of the broader landscape of savings and investment vehicles.
