Series EE Savings Bonds

When I think about savings bonds, I think of stodgy, low-yielding investments that my parents and grandparents used to buy. They bought savings bonds, squirreled them away in their safe deposit boxes and saved them for a rainy day. Often, they sat in those safe deposit boxes until they matured in 30 years. They were then cashed, to pay for our education or to supplement our parents' or grandparents' retirement income. In those days, a Depression mentality still prevailed in our society; everyone was afraid of losing everything just as they did during the Great Depression. The most popular investments were safe, very safe: bank passbook savings accounts, certificates of deposit, and US Savings Bonds. Some people still stuffed cash into mattresses or buried it in a jar in the back yard.

The Baby Boom generation (as well as generations X and Y) certainly seems to have shaken that Depression mentality. We struggle to live within our means because there is so much stuff out there that we want and that we think we need. It is difficult to say no to ourselves. We are borrowing, usually using credit cards, to consume. We are paying later for consumption now. Our grandmothers would fall away into a dead faint at the very thought.

The best-kept secret of the US Treasury is the new Series I savings bond. These bonds, like the older Series E and Series H bonds, are backed by the full faith and credit of the US Government. This means that there is little or no default risk, although these investments are not guaranteed to increase in value.

One of the problems of investing in savings bonds, or any fixed-rate investment, is that inflation erodes the value of the bonds. The Series I bond is inflation-indexed; in other words, if the inflation rate rises, Series I bonds will increase in value to compensate.

The interest rate on the I series bonds has two components: a fixed-rate component and an inflation component. If you bought an I-series savings bond before October 2003, the interest rate is 4.66%.

Series I bonds are bought at face value in many denominations, from as low as $50 to as high $10,000. They earn interest monthly for as long as 30 years, compounded semiannually. They are exempt from state and local taxes and federal taxes are deferred until they are cashed in. You do have to accept a penalty, however, if you cash in the bonds before 10 years since they are meant to be a stable, long-term investment. They can even be bought online. Check out www.savingsbond.gov.