Are Savings Bonds Still a Good Investment?

are savings bonds a good investment

Growing up, I had one relative that unfailingly gave me a savings bond for my birthday or Christmas.

And when I opened the envelope containing the certificate, my parents would nod sagely and say it was a valuable gift that would be worth a lot one day.

I took their word for it, promptly tucked it in a drawer, and then forgot about it for years. You likely have a bunch of them tucked away somewhere too, thanks to relatives similar to mine.

But now that the stock market is so volatile, more and more people are wondering, “Are savings bonds a good investment?”

What are savings bonds?

The U.S Department of Treasury has been issuing savings bonds since 1935.

Essentially, when you take out a bond, you are making a small loan to the U.S. government. And throughout the 30-year term, the bond builds interest. You then collect on the interest, on top of the bond’s cash value, after 30 years.

Or, if you can’t wait that long, the savings bond can be cashed in at face value after 12 months.

Savings bonds are one of the few investment vehicles backed by the U.S. government. And because you can get a bond for as little as $25, they offer a low minimum threshold for beginner investors.

They are also usually considered a relatively safe form of investing. After 12 months, when they reach their face value, their value only goes up. It doesn’t go down with the market, so they offer more stability.

Savings bonds of past years had variable interest rates. However, bonds today currently have a fixed rate of 0.10 percent. Interest is then added monthly and paid out when you cash the bond.

Savings bonds and millennials

As of last year, over 70 percent of American adults under 30 do not own any stocks or stock-based investments. That’s because many people are afraid of the volatility of the stock market.

And after the recession in 2008, people worry about losing everything on the market. Instead, they’re looking for a more secure option to invest their hard-earned money.

That means savings bonds are becoming more popular with more people considering “are savings bonds worth it?”

Are savings bonds a good investment?

On the surface, it sounds like bonds are the perfect investment opportunity. The money is guaranteed and makes a regular return. But bonds have plenty of drawbacks.

The rate of return is set by the U.S. government. And at 0.10 percent, it is one of the lowest returns you can get. While you are guaranteed to earn some interest on the money if you hold onto them, the returns are tiny.

The consequences of focusing on bonds over stocks can be devastating. Bonds simply do not earn the returns that can be expected in the stock market.

Without investment growth, many millennials will be left with inadequate savings and be unable to retire.

A more balanced approach

Instead of relying on savings bonds and cash for long-term goals like paying for school, use other vehicles like 529 plans. You will earn more money in the long-run than if you stuck with bonds.

If you are too nervous to invest your nest egg entirely in stocks, you can invest a small portion in savings bonds to provide some stability.

Some people opt to invest five to ten percent of their funds in bonds because the money is guaranteed. But investing much more than that will hold you back from earning more money.

Managing bonds you already own

That’s not to say bonds are worthless. If you have a stash of savings bonds, they still have value and can be cashed to pay for school or help you buy a home.

Your old bonds may have even earned a higher rate of interest, depending on when they were purchased.

But don’t think that the face value is what you will get. Older bonds were purchased at half their value. They took decades to mature so that $500 bond may be worth only $250.

Check out how much a bond is worth and when it will mature before purchasing it. If they have a few years left, it may make sense to hold on to them for now. They will be worth a lot more later on if you leave them alone.

You can find out how much your bonds are worth and how to cash them by visiting the Treasury’s website.

Final thoughts

In previous decades, savings bonds were a smart investment and a valuable gift. But decreasing returns has made savings bonds much less useful.

In fact, you can make more in interest keeping your money in a regular savings account at the bank, with much more flexibility.

So if you are wondering “are savings bonds a good investment?” skip the bonds going forward and explore other investment options. And if you are not sure where to start, check out this simple four-step guide to investing.

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