How Do Savings Bonds Work? Know the Facts and Save Securely

Savings bonds are securities issued by the US Treasury Department. When a person purchases a savings bond, they are lending their money to the US government, and in turn, earning interest. Savings bonds are low-risk, low-return investment options that mature over a span of time. Since savings bonds are backed by the “full faith and credit” of the US government, they are considered one of the safest ways to invest.

How to Choose a Savings Bond

There are two types of savings bonds: traditional series EE bonds and series I bonds. Knowing the difference between the two will help you decide which one is best for your savings goals.

Series EE Bonds

Series EE bonds—the more common of the two savings bonds—are purchased at a fixed interest rate and take 20 years to mature. At this time, the US government guarantees that the bond will have doubled in value. After 20 years, the interest rate is reset and the bond matures for 10 more years. While series EE bonds are exempt from local and state taxes, they are subject to federal income tax.

Series I Bonds

Series I bonds are purchased at an interest rate that is calculated by current fixed interest rates as well as the rate of inflation. Unlike series EE bonds, they take 30 years to mature. If inflation is expected to be high for the next 30 years, you may want to consider series I bonds. Otherwise, series EE bonds may be a better option if held to maturity. When deciding which bond is best for you, consider consulting a financial advisor.

How to Calculate the Cost of a Savings Bond

Savings bonds are purchased at face value with the guarantee that they will double in value by their date of maturation—generally 20 years for series EE bonds and 30 years for series I bonds. So if you’re considering a $5,000 series EE bond, you would pay $5,000 at the time of purchase with the expectation that your money would double to $10,000 after 20 years.

You purchase savings bonds electronically through the US Treasury’s website in any denomination from $25 to $10,000. Paper bonds are no longer available unless you purchase a series I bond with your tax refund. This is the only way to receive a paper bond.

How to Find Out How Much a Savings Bond Is Worth

Savings bonds collect interest yearly based off their fixed rate when purchased, which is usually relatively low. For current interest rates, visit the US Treasury’s website. They collect this small amount of interest every year until their maturation date, at which time they double in value.

For example, a $2,500 series EE bond purchased at an interest rate of 0.1 percent would only be worth $2,538 after 15 years. However, if you were willing to wait five more years, the bond would mature and be worth $5,000. After this time, you may choose to keep the bond for ten more years at a higher interest rate, generally around 3.5 percent.

If you currently own a savings bond and are unsure of its value, enter the required information into the US Treasury’s savings bond calculator. Beware of entering your information on any other non-official, non-governmental websites, as they could be scams.

How to Redeem a Savings Bond

If you’re ready to cash in your savings bond, there are a few important things to note. You cannot cash in a savings bond until it is at least one year old. However, if you redeem your bond before it is five years old, you will incur a penalty of three months’ interest. Bonds that have stopped earning interest (generally after 30 years) should be cashed in. Remember that the longer you hold on to your bond, the more it will be worth—especially if it has reached its 20-year maturation and is now earning a higher interest rate.

To cash electronic savings bonds, visit the US Treasury’s website. To cash paper bonds, visit your local bank or credit union. You may also mail your bond to Treasury Retail Securities Site, PO Box 214, Minneapolis, MN 55480-0214.

When it comes to investing, there are countless options available. Some prefer a more aggressive, high-risk and high-return approach. Others prefer more conservative money moves. Regardless of your preferences, savings bonds offer a great, safe way to double your money—given you have the patience to let them grow.