Posts Tagged ‘risk’

How do Savings Bonds Work

Friday, March 27th, 2009

Wondering Why You Should Invest in US Savings Bonds?

Are you wondering why you should invest in United States savings bonds, or how savings bonds work? This is a question that not enough people are considering these days, because most people are pressing their luck instead by gambling with stocks and other investments. So many people are turning to penny stocks thinking that they cannot lose, but this thrilling stock market is no way to turn a buck. Instead, people should look at savings bonds as a valuable part of an investment portfolio even if they do not appear to be as exciting as an investment.

First of all, you need to understand what a U.S. Savings Bond is if you want to take advantage of these lucrative investments. Back in the day, savings bonds were a popular form of long term investment for people who could not afford to buy common stock. This is back when a long term investment was only an investment that lasted longer than a couple of weeks. There are plenty of different savings bond options available to you out there, but the ones that are the best and the most worthy of your time are the ones that are backed by the United States. At their basic level, these savings bonds are a promise that if you lend money to the government, you will get it back with interest attached. The one risk lies in that the entity you lend to may not be able to pay it off as they have agreed to. However, when lending to the United States Government through US treasury bonds, the risk is a great deal less. Unless the entire American government goes bankrupt, you will eventually get your money back and you will earn interest in the process.

For all intents and purposes, you are lending money to the government when you purchase a United States savings bond. In the days of huge deficits, it is much easier for the United States government to raise money by selling US treasury bonds and savings bonds than to have to go to foreign lenders who require much larger interest rates and much higher returns on their investments. US treasury savings bonds are better for the government and the country because they do not require American citizens to pay taxes to pay foreign governments back for their loans.

Not only is this a lucrative deal for the government when it needs financial assistance, but because of compounding interest, it is also a lucrative deal for you. If you begin with a $1000 initial investment and make $50 monthly deposits, after taxes your nest egg would be nearly $20,000. Increase the interest rate by only a little bit to 3 percent and you will have a nest egg of $22,000 or more. If you think you can put away $100 a month instead of $50, your nest egg will grow exponentially to $42,000. There are also tax benefits associated with these bills that you will want to look into as well.

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Originally posted 2020-11-26 05:01:05. Republished by Old Post Promoter

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How Do Savings Bonds Work? Is My Money Safe if I Purchase Them?

Tuesday, December 23rd, 2008

B is for Bond.

These are questions most people ask when they consider buying savings bonds. Yes, your investment in savings bonds is one of the most safe investments you can make. You’re purchasing the bond and giving the government cash, which they pay you interest back on at a later date. It’s rather like the government borrowing a small amount of money from you, and paying interest on the loan.

Savings bonds are issued by the United States government.

They’re non-transferable, which simply means they must be sold by the government. You can buy savings bonds in a variety of denominations, with $50 and $100 savings bonds being quite popular amounts. You pay less than face value for the bond, and it begins earning interest so that when it matures, usually in several years, the bond is worth the face value. Most bonds will continue to earn interest for years after maturity, so by the time you cash in a bond it can be worth much more than its face value. Some bonds will continue to accumulate interesting for up to 30 years, so if you wish you can leave your investment long-term and still continue to earn profits.

Because savings bonds are registered securities, they’re replaceable.

If they’re damaged, stolen or lost, there is a record of your ownership of the bond so you don’t lose your money. And the amount of a savings bond can never go down, so the money you invest in a bond cannot be lost. Savings bonds are also fairly fluid—the money isn’t locked away so that you can’t get to it in the case of an emergency. But if you cash in a bond early, you won’t see the full return as it won’t be worth its face value yet. And bonds cashed before 5 years are also subject to an interest penalty. But for some, that risk is worth knowing that they can withdraw cash from their investment at any time.

When you purchase savings bonds, you do have to pay Federal Income Tax on the interest they earn.

But you can ease this burden on yourself—a wise choice if you have multiple high-value bonds—by paying the tax on this interest yearly. Or you can opt to wait until the bond is cashed in and pay this tax in one lump sum. You’ll only pay federal tax on bonds, not state or local tax, and if you use the bonds toward education, taxes are sometimes waived.

The two types of bonds you can purchase today are Series EE bonds or Series I bonds.

For Series EE bonds (also called Patriot Bonds) you’ll pay half the face value and it will draw interest every month for 30 years. Series I bonds also accrue monthly interest for 30 years, but you pay full face value for the bond and the interest rate varies with the current inflation indexes.

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