Savings Bonds: Super-Safe Alternatives

If you want to get into bonds for a relatively small amount of money, the government still sells traditional U.S. savings bonds (now called EE Bonds). Savings bonds are extremely safe, but the trade-off is that they pay a fairly low interest rate, currently 3.6 percent. The minimum you need to invest in EE Bonds is $25. They’re available in increments of $25 from banks, or in any amount of $25 or more (up to the annual purchase limit set by the Treasury) from www.TreasuryDirect.gov. All EE Bonds will pay monthly interest for up to 30 years, but unlike Treasury bonds, you won’t be getting a check every six months—you need to cash them in (also called redeeming them) to get the money. You can redeem these bonds at any time after one year, but beware: If you cash in a savings bond before five years, you’ll have to pay a penalty of three months’ worth of interest. Another type of savings bond that anyone can buy is Series I savings bonds—I Bonds, which are like traditional savings bonds with an extra shield against inflation. In late 2006, I Bonds paid 1.4 percent in interest above inflation, which the government re-measures every six months before announcing the new rate. If the official rate of inflation comes in at 3.1 percent (for example), new I Bonds would yield that amount plus 1.4 percent, or 4.5 percent. Unlike EE Bonds, I Bonds are sold at face value and accumulate interest over time. You can start buying I Bonds with as little as a $50 initial investment from a bank or as little as $25 through the TreasuryDirect program. They can be cashed in any time after a year, up to 30 years after you buy them. As with EE Bonds, there’s a three-month interest penalty if you cash them in before five years. Savings bonds are non-marketable, meaning that they cannot be sold in the secondary bond market. They can only be redeemed for their current value from the Treasury or a Treasury agent (which includes most financial institutions).