How to Maximize the Benefit of a Savings Bond

Nothing makes Grandma and Grandpa less popular than when they top last year’s ugly sweater present with an untouchable investment for your fourteenth birthday: the dreaded savings bond.

As of 2006, according to CNN, the U.S. Department of the Treasury is sitting on approximately $13 billion in savings bonds that have not been redeemed, yet no longer earn interest because they have already reached maturity. Savings bonds, which are not subject to state tax, can earn interest for 30 years.

Savings bonds are rooted in the practice of patience, responsibility and financial awareness. These aspects are probably what cause grown-ups to invest in millions of the disappointing birthday gifts every year. They know that one day, they might develop into a decent payday.

Savings Bond Synopsis

Savings bonds are secure investments that generally offer higher interest rates than savings accounts. They can be owned by minors, presenting an opportunity to give young Americans an early perspective on the value of an untouchable sum of money.

Bonds can be purchased in denominations as little as $50, and as high as $10,000. The buyer pays half the value of the denomination. It takes a long time for the bond to mature because the savings bond value is determined by interest rates that fluctuate over time. However, bonds are guaranteed to reach full value after twenty years.

How Do You Get the Most Out of Your Savings Bond?

Bond rates are the only thing that make your savings bond interesting.

If you received a savings bond when you were a minor, then it’s probably close to the point of maturity now and you’re able to cash it. Technically, you can redeem a savings bond after one year. However, they do not reach maturity for a full 30. This gives you 29 years to determine whether or not it’s worth keeping the investment alive.

Paying attention to interest rates is the best way to determine how much financial assistance your savings bond will eventually provide. Since interest rates have the potential to fluctuate, patience is an important virtue. Today, interest rates might be worth waiting for improvement.

As of May 2010, interest rates for savings bonds are between 1.4 and 2.4 percent, where they will remain until November of 2010. A mere decade ago, rates were as high as 6.39 percent. To put it in perspective, if your account opened in 1982, your bond had an interest rate of 13.05 percent.

If you redeem your bond before five years, you’ll have to give the Treasury back three months worth of interest. Obviously, it’s less of a financial hit taking money out early today than it would have been in 1982.

Due to fluctuating interest rates that remain low, returns on savings bonds will probably never make you a fortune. However, if you’re patient and you wait for your savings bonds to reach maturity, the eventual savings bond value could finally justify your grandparents’ decision make you wait for the money you wanted them to give you 30 years ago.