How Do Savings Bonds Work?

Looking for a simple way to invest while still being able to easily access your money? Savings bonds may be your answer. Issued by the U.S. Treasury, U.S. savings bonds can be purchased in amounts ranging from $25 to as much as $10,000. Every year you hold a savings bond, its value increases until it matures at 30 years. Before buying savings bonds, learn how they work, where to get them and whether they fit with your goals.

How Do Savings Bonds Work?

Savings bonds are a low-risk way of saving money. A simple way to explain how savings bonds work is to imagine the U.S. government borrows money from you and promises to pay it back with interest by a certain date. The government guarantees you won’t lose your initial investment, which is why bonds are considered a low-risk investment.

There are two types of savings bonds: EE bonds and I bonds. Both mature after 30 years. Series EE bonds are the most common, and they're guaranteed to double in value after 20 years, regardless of changing interest rates. Series I bonds don't share this guarantee.

While EE and Series I savings bonds mature fully after 30 years, you can cash them in after a year. However, if you redeem savings bonds in less than 5 years after they're issued, you’ll lose the previous 3 months of interest. But, the interest you earned before that is yours to keep.

How Do Savings Bonds Accrue Interest?

The two types of savings bonds accrue interest differently.

• Series EE savings bonds issued after May 2005 earn a fixed rate of interest, which is set when purchased. According to TreasuryDirect.gov, interest is added to the value of the bond twice a year. And each year, as your balance grows, so will your earnings. In other words, over the years, you’ll even earn interest on the interest.
• Series I bonds can be a good option if inflation stays high. They earn a fixed rate plus an inflation rate, which could change every 6 months. Each May and November, the U.S. Department of the Treasury calculates interest rates based on the rate of inflation in the previous 6 months. Interest is paid once your bond reaches its 30-year maturity or you cash it out. Series I bonds can end up paying a higher rate of interest than a Series EE bond, if you're willing to take the risk.

Where Do You Buy Savings Bonds?

Until a few years ago, you could buy paper savings bonds at most financial institutions. Today, you get electronic savings bonds directly from the U.S. Department of the Treasury's website, TreasuryDirect.gov. One exception: paper I bonds are also available when purchased as part of your income tax refund. 

To get started, you'll need to create a free TreasuryDirect.gov account.

When Are Savings Bonds a Good Investment?

If you’re looking for a relatively safe way to save and earn money over time, savings bonds could be a good addition to your portfolio. Since they retain their face value, their worth will only increase over time. However, they grow slowly compared to other saving and investment opportunities. They may not earn as much as other types of savings options, and you may find better tax advantages elsewhere. People typically purchase savings bonds for:

• emergency funds
• education funds
• gifts
• as part of a retirement portfolio

You should know that interest earned from savings bonds is subject to federal income tax, as well as estate and gift taxes, but isn’t subject to state or local income tax. TreasuryDirect.gov also states that when the inflation rate is low, EE bonds may be preferable to I bonds. But, in periods of high inflation, I bonds generally offer a better return.

More Ways to Grow Your Money

Interested in more ways to help your money grow? Visit navyfederal.org to see how we can help you save and invest for a secure future.