The federal government collects taxes to pay for its operations, but tax revenue isn't always adequate to pay for all of the government's spending. The U.S. Department of the Treasury issues savings bonds to help meet the government's financial needs. When you buy a savings bond, the government pays a fixed interest rate on the bond and you can redeem it to recover the face value and collect your interest. Savings bonds are safe investments but offer relatively low returns, so they may or may not be a good investment for you depending on your financial goals.
The main advantage of savings bonds is that they are among the safest investments you can make. According to the Securities and Exchange Commission, savings bonds are backed by the "full faith and credit of the U.S. government." When you buy savings bonds you are essentially lending to the federal government, so you are guaranteed to get your money back unless the government fails. Savings bonds can be redeemed at any time for their original face value and pay fixed interest, so savings bonds are as close to a sure thing as you can get when it comes to investing.
Savings bonds tend to have relatively low interest rates, so they don't offer the same potential for large return than other investments like stocks. According to CNN, stocks have historically produced returns of about 10 percent over the long-term. While stock performance can vary greatly from one year to the next and savings bonds offer steady, positive returns, stocks are often preferred by long-term investors due to higher growth potential.
Inflation is the rate at which prices are increasing in the economy. Inflation eats away at the effective return on investments: if a bond pays a 5 percent interest rate, but the inflation rate is 3 percent, your actual return in terms how many goods and services you can buy is only 2 percent. Savings bond rates tend to be near or even below the inflation rate, so you might not actually increase your effective wealth by investing in savings bonds. According to the U.S. Department of the Treasury, standard electronic savings bonds or "Series EE bonds" pay an interest rate of 0.20 percent and inflation-protect I Series savings bonds pay a rate 1.76 percent as of November 2012. Investments like stocks with higher potential returns have a better chance of outpacing inflation.
You can buy savings bonds directly from the government for as little as $25 and you don't face transaction fees when buying bonds. This can be a significant advantage if you only want to invest a small amount of money. Savings bond interest is also exempt from state or local taxes and you don't have to pay federal taxes on a bond interest until you cash it in.
- U.S. Securities and Exchange Commission: Savings Bonds
- TreasuryDirect.gov: Public Debt Announces New Savings Bonds Rates
- TreasuryDirect.gov: EE Savings Bonds In Depth
- Equifax: Savings Bonds: Pros and Cons
- Forbes: Are I Series Bonds A Good Investment For The Next 5 Years?
- CNN: Investing your Money Basics
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.