Today I was getting ready for the day, when I remembered the envelope of US Savings Bonds I had in my desk drawer. I looked through them and remembered that I had planned to do something with them a few years ago. Some of them have stopped paying interest (they stop paying interest after 30 years with no notification), so we’ve been giving an interest-free loan to the government for a few years. The worst offender is a 1986 $50 savings bond that has not been paying interest for almost six years! You’re welcome, Uncle Sam.
Anyone who is in their forties and who has some of these in a desk drawer or a safe deposit box should take some time this holiday season to take a look at their bonds. Even if they are not expiring, you might want to think if there is somewhere better to put the money, which would be almost anywhere. Older savings bonds – all of which have now stopped paying interest – paid a guaranteed rate if held for a long enough period of time. Savings bonds since the mid-nineties started paying a variable rate of return that was never as good as the fixed rates that were paid prior since interest rates in general have been so low since that point. A sample of the interest paid by different bonds is shown in the table below:
Denom
Issue
Date
Next
Accrual
Final
Maturity
Issue
Price
Interest
Interest
Rate
Value
$50.00 05/01/08 01/01/16 05/01/38 $25.00 $2.80 1.40% $27.80
$50.00 05/01/14 01/01/16 05/01/44 $25.00 $0.16 0.50% $25.16
$50.00 03/01/10 01/01/16 03/01/40 $25.00 $1.84 1.20% $26.84
$50.00 05/01/94 01/01/16 05/01/24 $25.00 $33.78 4.00% $58.78
$50.00 05/01/95 05/01/16 05/01/25 $25.00 $26.80 1.31% $51.80
$50.00 05/01/96 05/01/16 05/01/26 $25.00 $26.46 1.31% $51.46
They are sold as $100 and $50 bonds, but those numbers mean absolutely nothing. Many organizations use them, however, to make it look like they’re giving a bigger gift or prize than they actually are.Beyond the sub-market, variable rate paid, there are a lot of reasons to not like savings bonds. Really, if they weren’t offered by the Government, the Federal Consumer Protection Bureau would probably be sanctioning them today. There is really quite a few “gotchas” in how they are marketed and their terms. These include:
- As previously stated, the interest rate is variable for bonds issued since about 1995, instead of being fixed like many bonds. This means you have no idea how much your investment will be worth in a given number of years. Most investments that pay a variable return pay a higher return than something fixed-rate to make up for the uncertainty, but not savings bonds.
- If you cash them in at the wrong time, you lose several months worth of interest. Because the bonds pay every six months, if you cash them in at any time besides the month in which they are issued or the month six months later, you’ll be giving up interest. With normal corporate bonds, you’d collect that interest from the buyer. This seems to be a good way to make you forget to cash them in, then need to wait another 6 months for another chance, when you’ll probably forget again.
- They stop paying interest with no notice after 30 years. Forget about that bond your Aunt Ruthie got you for your eighth birthday, and you’ll be giving out a free loan.
- When you cash them in, you pay taxes on the interest. So Uncle Sam pays you interest, then takes some of it back! What gives?
You can find out how much your bonds are worth, what they have been paying, and when they’ll mature by going to the US Treasury online Calculator. If you have one of the older, pre-1995 bonds, you may want to go ahead and hold onto it until expiration since a guaranteed 4% interest rate is pretty good right now. If you have one of the later bonds, or even if you have one of the earlier ones, there are some better places to out the money. Here are some suggestions:
- Pay off some credit card debt. I guarantee the interest rate you’re paying there will be way above 4%.
- Put more money down on your home, or pay a payment early.
- Pay off some student loan debt.
- Put money away for your children’s college in an Educational IRA or a 529 plan.
- Pay for some of the expenses of children in college. At one point you could actually cash in savings bonds tax-free if used for educational expenses. Check with an accountant on this one.
So spend some time this season to go through your old savings bonds and see if there is a better use for the money. Your Uncle Sam is in enough debt and doesn’t need to owe you money as well. Plus, he isn’t as well off financially as he once was, so it isn’t as certain that he’ll pay you back as it once was. You can bet that the dollars he pays you back in aren’t going to be as valuable as those you lent him.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
