Savings Bonds

When I was growing up, I didn't receive Savings Bonds as gifts. I did know some friends that had a few thousand dollars worth in a safe somewhere, but that was pretty much the extent of my exposure to them. Then a couple years ago, on my first wedding anniversary, my mother-in-law gave us (me) a $100 EE bond. She knew I was getting more involved into personal finance, and she thought this would be a good gift. Her rationale is that in about 20 years when our children are off to college, my wife and I can take this and other Savings Bonds, cash them in, and take a vacation someplace. Sounds good to me. So since then, she has given us (me) a bond every anniversary (we've had four in all) and most of my birthdays. Over $1000 in Savings Bonds is sitting in my safe right now. Of course, at this moment they are not worth $1000, probably closer to $500. Let me explain.

I have bought a few of these bonds as gifts over the past couple years because I thought the idea was a good one. First of all, I purchase mine at my local checking account branch. There's a form that has to be filled out, including S.S. #'s of the giver and recipient, address where the bond will be sent and so forth. The amount of the bond you are purchasing is exactly half of the value of the bond upon maturity (likely between 15-20 years away). The interest rate on the EE bonds is not so great - 3.6% right now - and that is why it takes so long to double. So if you plunk down $25 on the kid, the bond their parents will receive in the mail in a couple weeks will say $50 (and gives you an elevated sense of generosity!) A couple families I've given bonds to have really been grateful and one or two others have looked at it like "What am I going to do with this for the next 20 years?" Personally, if the kid is old enough to talk and play around, I go with a toy instead of the bond. But with my Godson, he gets both...

Another way to go if you are interested in Savings Bonds is to purchase them directly from TreasuryDirect. A pretty cool site with a lot of interesting information, and even step-by-step instructions on how to convert paper bonds to electronic, where you can keep tabs on how much interest your bonds have accumulated. At some point, I have to look into doing this for our bonds.

There are other investments you can purchase at Treasury Direct besides EE Savings Bonds, like I Bonds. I Bonds are different because they are not at a fixed interest rate for the entire time you own them. Instead, the rate takes a fixed rate (1.4% right now) and the inflation rate (1.55%) set every May and November, and then creates a composite rate based on these two figures (4.52%). The formula is explained at the site.

For the last 18 months, I have invested $25/month to I Bonds as a way to add some variety to our portfolio and because the rates have been so good compared to the EE bonds. I figure with all the different things I spend $25 in a month, this one should continue to grow, and maybe in 5-10 years, will pay for a nice toy or vacation.