Part 2: Pitfalls and Risks of Savings Bonds
Part 3: How to Buy Savings Bonds
Because they’re backed by the full faith and credit of the US Government, the default risk on savings bonds is very small. It is unlikely that the government wouldn’t be able to pay its debts. If things did get that bad, I suspect that you’d have much more urgent problems to deal with (like finding food, shelter, safety, etc).
Restrictions on Redeeming Savings Bonds
If you’re going to invest in savings bonds, you need to be aware of the restrictions on cashing them in. You may not cash in within 6 months or 1 year of the original issue date (6 months for bonds issued before February 2003, 1 year for bonds issued after February 2003). Also, you’ll be penalized for cashing in within the first five years (you lose the last three months’ interest).
Inflation
Because they’re relatively safe, savings bonds don’t offer huge returns. This means you risk watching your earnings get gobbled up by inflation. With that in mind, I recommend using savings bonds for situations where you simply can’t afford any risk to principal. If you have a long time until you’ll use the money, you may want to at least investigate other investments.
If you’re going to use savings bonds, Series I savings bonds include a hedge against inflation. You earn a modest fixed rate plus an inflation-adjusted rate. During periods of high inflation, you earn more. When inflation is low, you earn less.
