Should You Invest in U.S. Savings Bonds?

Think About US Savings Bonds

Many years ago, it was just expected that people would invest in U.S. savings bonds as part of their savings practices. After World War II, citizens saw it as a patriotic duty to purchase these bonds, which work as something of an investment in or loan to the federal government. Today, however, fewer and fewer people are adding U.S. savings bonds to their financial portfolio as they are becoming more diversified with their investments and opting for those that offer a higher rate of return. Does this mean however that you should just bypass the option of purchasing U.S. savings bonds? What purpose would they serve in today's financial portfolio?

Set Interest Rate

One of the reasons that some are still interested in purchasing U.S. savings bonds is that they have a set rate of return. Unlike other investments that may go up or down when it comes to their interest rate or rate of return, bonds have a set interest rate for the life of the bond.

Unfortunately, the interest rate of these bonds is typically somewhat low and has at times even dropped below the inflation rate. This has been the general pattern with these bonds since the mid 1990's when interest rates for investments and the Federal Reserve began to be lowered continuously. As a matter of fact, the interest rate being paid out for U.S. savings bonds issued between November 2007 and April 2008 was only at 3.00%, whereas inflation rates were holding at around 3.25% or even higher, depending on which index you would use to figure these rates.

Having an investment that maintains a set interest rate is very attractive for some investors who have a very low tolerance for risk. Some may want to hedge their investments by adding to their portfolios with these low-risk, although low reward, U.S. savings bonds.

Bonds as Gifts

One common practice for those who typically purchased U.S. savings bonds was to give them as gifts to children or grandchildren. This was because bonds could be purchased using the recipient's social security number, putting it directly in this person's name. A recipient could avoid such things as probate court or other such complications when it comes to inheritance of property or funds.

While it may seem fun to give away U.S. savings bonds as gifts, and for some children this can be a great thing to receive if they understand how their savings can grow, for the more serious investor there needs to be other reasons for purchasing bonds other than the idea that they make for a interesting keepsake.

When to Purchase U.S. Savings Bonds

So if the interest rates on bonds are falling consistently and sometimes even lag behind the rate of inflation, why would anyone be concerned with purchasing them? When is a good time to add them to your financial portfolio?

Remember that U.S. savings bonds are a safe investment in which you'll never lose money. When you spend $500 on a bond, it will never be less than $500; unlike a CD or other investment purchase, the bond's face value never decreases. And while the interest rates have been dropping steadily, keep in mind that they are still very competitive with other money market accounts which too have seen their interest rates falling. Also, there are certain tax advantages to purchasing U.S. savings bonds, specifically, you don't pay state or local income tax on the interest your bonds earn. The interest compounds tax-deferred until you actually redeem the bonds. Also, if you use the bonds to pay costs for college, the interest could be tax exempt as well.

U.S. savings bonds are a smart investment if they are used as part of an overall financial portfolio. They may still be viewed by some as being a fun gift to give to children, and indeed they can be, but shouldn't be thought of as one's only investment option. Depending on your particular financial needs, you should consider simply adding U.S. savings bonds to your investment strategy as a whole.

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