Are U.s. Savings Bonds Right For You?
Why invest in US Savings Bonds? Its a question that few people consider these days, with everyone pressing their luck gambling with stocks, hoping and praying that they will strike it rich with that “sure thing” hot penny stock. While it may not be as riveting as trading stocks, savings bonds can play a very important part of your portfolio.
So before you get stuck in the stocks vs bonds debate, lets have a look at the benefits of bonds.
So, lets start off by answering a basic question: What is A U.S. Savings Bond?
Generations ago when only well off people could buy stocks, savings bonds were a very popular long term investment, at a time when long term meant longer than a few months. So while there are several savings bonds options out there, the ones backed by the United States government are the best quality. At its most simple, a savings bond is a promise that if you lend money, you will get it back with interest. The risk is that the entity receiving the money may not be able to pay it off as agreed. With the U.S. government, the danger is minimal. Short of the American government declaring bankruptcy, you will get your money back with interest.
For all intent and purposes, by purchasing a US savings bond, you are lending your money to the government. In these days of large deficits, its better for the US government to raise funds via savings bonds, than to have to go to foreign lenders (who normally charge a much higher rate - causing US taxpayers to pay out even more money).
Whats In It For You?
Its all about the magic of compounding interest. If you were start off with a $1000 initial investment, and made monthly deposits of $50, you would have a nest egg of almost $20 000 after taxes.
Increase the interest rate to 3% and you’ll have over $22 000. Think you can put away $100 a month? Say hello to over $42 000. There are also some tax benefits regarding education savings that you’ll want to look into.
These may not seem like huge numbers, but, its a lot larger than your own bank account is receiving. Think about your kids and their education? $42 000 is a large down payment on a great education. An added bonus: you can purchase them at your bank.
For those who don’t like risk, you wont find a more risk adverse investment than savings bonds. Each type of investment has its own purpose. If you are looking to put some money away, US savings bonds are among the best investments you can make. If you are looking for a quick buck, this is not going to work for you. If you’re a trader like myself, taking your profits off the table and socking them into a savings bond is a great strategy to continue to build your capital, without putting your money at risk.
By buying U.S. savings bonds, you’ll help to ensure that your tax bill doesn’t have to be higher and know that your money is safe.
Filed under Financials