Why would anyone buy savings bonds?

[Porsche-O-Phile]

Well, they're outperforming real estate right now...

I agree though. Savings bonds suck as an investment tool. I'll buy my kids Euros or Rupees and let them hold those. The rates of return are going to be a lot better than the greenback for the foreseeable future.

[m21sniper]

Originally Posted by Martin Smith

You know you can take those savings bonds into the bank and get whatever their present value is any time you want. (That's what I did to buy concert tickets in high school.)

So having a piece of paper that says year "20xx" on it does not force the kid to save it, any more than having a coin collection or other instrument, FYI.

Yep, that's why you take em away from the little ankle snipper as soon as you explain what they are to him.

[VaSteve]

Originally Posted by lukeh

My 6 year old son keeps getting these savings bonds as gifts. Why does anyone think this is a good gift to give? His EE bonds all pay a 30 year fixed rate of between .7% and 1.2%. How on earth can someone think giving a 30 year bond paying a fixed rate of .7% is a smart move? Just give him the cash and I could put it in a lousy CD and get triple that. He also has a few I bonds that are paying better than the EE bonds but because they are tied to inflation the rate for the past 6 months was actually ZERO percent. Yes, my son was given a bond that had a current rate of zero.

The other thing that kills me is how the taxes work. Right now the taxes on these bonds are deferred until the bond matures. That sucks because as a child he'd pay no taxes on his interest but will instead be hit with all the taxes at once when he's 35 and in a real tax bracket.

These things suck all the way around. The only reason for a gift like this that I can think of is that the person buying them has no clue what they pay or how they work. I cashed them all in early and put them in a mutual fund inside a college account. I think over the next 13 years the market can average better than .7%.

Interest is excluded from income if you use them to pay for higher education.

See page 10: http://www.irs.gov/pub/irs-pdf/p550.pdf

[lukeh]

Originally Posted by VaSteve

Interest is excluded from income if you use them to pay for higher education.

See page 10: http://www.irs.gov/pub/irs-pdf/p550.pdf

Interesting.

The only trouble is the cost of college is growing at 6.5% a year while his bonds were growing at around .7% a year. I can't see why a person would save for college using an investment that pays a fixed rate of .7%. You can get a CD paying 3% and pay the taxes and still be way ahead. The CD also can pay 5% or more when rates go back up. The EE bond will still be paying .7%. The CD could also be placed in a CESA or 529 account which is also comes out tax free for college. Other than a non interest checking account, the savings bonds might be the worst way to save for college.

[VaSteve]

Originally Posted by lukeh

Interesting.

The only trouble is the cost of college is growing at 6.5% a year while his bonds were growing at around .7% a year. I can't see why a person would save for college using an investment that pays a fixed rate of .7%. You can get a CD paying 3% and pay the taxes and still be way ahead. The CD also can pay 5% or more when rates go back up. The EE bond will still be paying .7%. The CD could also be placed in a CESA or 529 account which is also comes out tax free for college. Other than a non interest checking account, the savings bonds might be the worst way to save for college.

Concur with all you said. It's an old product that can't really evolve with the times...and, well, look at the market. But, it's a convenient way for grandma and aunts to give a little something toward education without the tackiness of "here's my kids 529 account, please donate here..." They people that are buying them are probably not financial wizards anyhow...some banks still have "Christmas club" accounts for those that want them.

I have a stack of EE bonds at the bank for my kids as well.

[Danimal16]

As others have said, in the old days they paid much better. I think it was in the 1980s where they were really dumbed down.

[Dueller]

When I was born, my parents began tucking away $25/month in savings bonds each month. They gradually bumped it up to $100/mo. Father was military so there was that connection. Some of my earliest memories in the late '50's was the almost ceremonial ritual of the bond coming in each month and my dad carrying it over to a compartment in his Grundig console stereo and telling me this was for my college education. I remember being wowed as the stack grew and grew. By the time I was 16 it was a tidy chunk in my eyes. Bt I got a full academic ride so my parents didn't have to use them for me. IIRC most of it went to put my brother thru veterinary school.

My parents were never "sophisticated" investors...sticking to things like long term CD's (GREAT in the 70's when they were getting 15-20% returns) but they were always steady savers and lived far below their means. With a few relatively modest inheritance windfalls (which they never touched) and a conservative lifestyle to this day, their net liquid worth is in the low-mid 7 figure range. Between CD's (still!!), annuities, military retirement, soc security, teacher retirement, part time hobby cattle farming, and ag rentals, their annual income is in the low 6 figures. Yet their monthly nut is only $2K per month or less. They are still socking away cash.

Who am I to tell them their long term strategy was flawed? I'll never be as flush as they are

[dd74]

Originally Posted by Dueller

Bt I got a full academic ride...

Now that's (or rather you were) a better investment.

[red-beard]

How much does a $50 savings bond cost these days? Do you pay face value, or are you buying it at a discount?

[red-beard]

Originally Posted by Dueller

When I was born, my parents began tucking away $25/month in savings bonds each month. They gradually bumped it up to $100/mo. Father was military so there was that connection. Some of my earliest memories in the late '50's was the almost ceremonial ritual of the bond coming in each month and my dad carrying it over to a compartment in his Grundig console stereo and telling me this was for my college education. I remember being wowed as the stack grew and grew. By the time I was 16 it was a tidy chunk in my eyes. Bt I got a full academic ride so my parents didn't have to use them for me. IIRC most of it went to put my brother thru veterinary school.

My parents were never "sophisticated" investors...sticking to things like long term CD's (GREAT in the 70's when they were getting 15-20% returns) but they were always steady savers and lived far below their means. With a few relatively modest inheritance windfalls (which they never touched) and a conservative lifestyle to this day, their net liquid worth is in the low-mid 7 figure range. Between CD's (still!!), annuities, military retirement, soc security, teacher retirement, part time hobby cattle farming, and ag rentals, their annual income is in the low 6 figures. Yet their monthly nut is only $2K per month or less. They are still socking away cash.

Who am I to tell them their long term strategy was flawed? I'll never be as flush as they are

You need to become an ambulancer chaser, or learn to channel injured children...

[m21sniper]

Originally Posted by red-beard

How much does a $50 savings bond cost these days? Do you pay face value, or are you buying it at a discount?

A savings bond always costs 1/2 it's face value.

[lukeh]

Originally Posted by red-beard

How much does a $50 savings bond cost these days? Do you pay face value, or are you buying it at a discount?

EE savings bonds are 1/2 face value.

I bonds are face value.

When my aunt gave my son a $50 EE bond I asked her if the bank told her about I bonds. She said yes but liked the EE bonds better. I asked her why because at the time EE bonds were locked at .7% while the I bonds averaged more than triple that. She said the EE bonds were a better deal because she she got a $50 EE bond for only $25 and she would have had to pay the full $50 to get a $50 I bond. At the end of the day she had no clue how the bonds worked and how the interest was calculated.

I agree with the people who said it's mostly grannies buying these and my guess is they have no clue how they work or even what the rate is. The just get them because that is what their parents did back in the day.

[red-beard]

Originally Posted by lukeh

EE savings bonds are 1/2 face value....my aunt...said the EE bonds were a better deal because she she got a $50 EE bond for only $25

I think this is the reason a lot of people buy them. They give what looks like a bigger gift, but it only cost them half.

[cashflyer]

I received this as an email blurb from my accountant today:

New use for tax refunds!
Starting next year, taxpayers can check a box on their tax returns to buy Series I savings bonds with their tax refund.

[dd74]

Originally Posted by cashflyer

I received this as an email blurb from my accountant today:

New use for tax refunds!
Starting next year, taxpayers can check a box on their tax returns to buy Series I savings bonds with their tax refund.

How about instead of paying taxes, we buy bonds.

[Vintage Racer]

Originally Posted by lukeh

EE savings bonds are 1/2 face value.

I bonds are face value.

The interest on "I" bonds are also adjusted every quarter (1.9% + CPI). I think these bonds are an important part of portfolio diversification. They are safe and liquid. They protect against inflation (which is almost certainly forthcoming).

"EE" and "I" bonds are also exempt from federal income taxes until "cashed in". They are always exempt from State income taxes.

There is nothing wrong with keeping ~10% of savings in inflation-protected government bonds (TIPS or "I" bonds). I own another 25% in CDs and other bonds. I have 65% of my savings in stocks. I never borrow money for anything.

IMO, a person's ability to save money is the most important decision. Staying away from debt is next important, and proper diversification is next. Avoiding the tax man is important.

[red-beard]

Not to pick nits, but

Savings is money put aside for a rainy day. It is pure capital, and liquid.

Investments are money put into speculation with the intent of growth or income.

[lukeh]

Originally Posted by Vintage Racer

The interest on "I" bonds are also adjusted every quarter (1.9% + CPI). I think these bonds are an important part of portfolio diversification. They are safe and liquid. They protect against inflation (which is almost certainly forthcoming).

This isn't quite correct. It is not 1.9% + CPI. That fixed rate changes as that fixed rate for a person buying an I bond as of today is .3%. It will also stay at .3% for the life of the bond. I bonds were a much better deal when they first came out as the fixed rate was much higher.

The interest also doesn't adjust quarterly. It adjusts semiannually in May and November.

I also wouldn't consider them liquid. They can't be sold the first year of ownership. You also lose a portion of the interest if you cash them during the first 5 years.

I can see these as a small portion of a total portfolio for an older or very conservative investor. I can't see buying them as a gift for a 3 year old especially as a way to save for college.

[MBAtarga]

We bought some through payroll deduction years ago. The interest would be tax deductible if when they were cashed it was used for college tuition - which was our intent. Of course there was an income cap at which this was no longer applicable and taxes would have to be paid. We continued to buy them for several years after that, but then stopped. Guess who's no longer under that cap?

They have almost tripled in value from the face value at which they were purchased though.

[Vintage Racer]

Originally Posted by red-beard

Not to pick nits, but

Savings is money put aside for a rainy day. It is pure capital, and liquid.

Investments are money put into speculation with the intent of growth or income.

There are two ways to have a large portfolio: Save money from wages or inherit money. I am not a member of the "lucky sperm club" so I had to save money in order to invest it.

Originally Posted by lukeh

This isn't quite correct. It is not 1.9% + CPI. That fixed rate changes as that fixed rate for a person buying an I bond as of today is .3%. It will also stay at .3% for the life of the bond. I bonds were a much better deal when they first came out as the fixed rate was much higher.

Why does the TresuaryDirect program say:

I Bonds are a low-risk, liquid savings product. While you own them they earn interest and protect you from inflation.

Individual - I Savings Bonds In Depth

I also wouldn't consider them liquid. They can't be sold the first year of ownership. You also lose a portion of the interest if you cash them during the first 5 years.

That is true, but I am talking about long-term investing. There is a 3-month penalty if you "cash in" in the first 5 years. Yet, it is still liquid in that you can get your money quickly.

I can see these as a small portion of a total portfolio for an older or very conservative investor. I can't see buying them as a gift for a 3 year old especially as a way to save for college.

My recommendation is based on my experience of being a money manager for many years. What is wrong with investing 10% in TIPS while investing 65% in stocks when you consider that many people tend to panic (like last year) when stocks go down 60%?

The general public tend to panic when investing 100% in the stock market at the low (March 9th this year). They sell out at the low point and experienced investors jump in.

It is still happening. People are still, as they always do, moving billions into bond funds (yesterday's winner) while withdrawing from stock funds (p. C11 WSJ, today's issue).

The U.S total market is up 27% this year. Bonds did well last year.

It's because short-term investors (or savers) have seen no yield in the last decade. But they enjoyed 16.6% annual returns in stocks in the 1980's and 17.6% in the 1990's. People tend to ignore the historic returns of stocks vs. bonds vs. RE. Stocks have returned 11.6% over the last three decades (WSJ, this week).

Market history tells us that a 27% gain (this year, total market indexes) is not usually followed by more gains (the easy money is already made).

The Fed is pouring taxpayer money into the system. Obama has promised to raise my tax rates. The capital gains tax rate as well as the dividend tax rate will certainly increase (as the Bush rates expire).

You can be aggressive with a 3-year old's portfolio, but I remain cautious.

But (thanks to having no debt), I plan to race a full schedule next year. My bond coupons will pay for it regardless of the stock market.

Good luck, and I hope you watch the hedge fund money transfers (they are going short bonds, esp. Japanese bonds). They were buying stocks at the March low and are now pulling back. You do know how to watch this?

The only thing that counts is how much money you have at the end of every year. Theories and pundits are useless since net worth is the most important thing in proper investing.

And what you you think about debt? It was just a few years ago that pundits were arguing with my that buying a home with full leverage was much smarter than proper investing. Those guys are now facing foreclosure.