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Savings-Bonds-Alert: Are Savings Bond rates too low?

Monday, September 27, 2004

Are Savings Bond rates too low?

If I bought a $1,000 Savings Bond today for $500 and it takes 20 years for it to reach face value, thats only $25 a year interest. This doesn't seem like much and I am sure there are other places to invest that would yield higher returns and high security. If I could find a higher yielding interest rate with security would it be more prudent to invest there? Tom's response The "20 years to reach face value" feature of Series EE Savings Bonds is a guaranteed minimum. If the prevailing level of interest rates goes up, today's EE bonds could reach face value much sooner than that. In the context of continuously changing interest rates, the key difference between Savings Bonds and the alternative investments is that Savings Bond interest rates adjust every six months. With CDs, you lock-in today's rate for the term of the CD. When interest rates are low, as they are now, the better option is to go with the adjustable-rate option, so that you'll automatically get increasing returns as rates go back up. When interest rates are high, on the other hand, it's better to lock in the high rate for several years with a CD or other fixed-rate investment. That said, there are investments that have historically earned more than Savings Bonds, but there are also investments that have done much worse. Savings Bonds are very safe and consequently don't earn much. As you move into other investments you increase your risk in return for the chance to earn more. The prudent thing to do is to build a foundation of at least six-months worth of income in low-risk investments, then begin to diversify your holdings by adding higher-risk investments to your portfolio.


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