There are a variety of bonds out there to choose from. So many in fact, that it can be hard to know the right one for you to buy for your financial freedom needs. In today’s post, I will explain a couple federal options for you for your passive income and savings and the pros and cons of federal bonds.
US Treasury Bonds are not often the common favorite but they still yield savings and are a very safe, low risk investment. The only way you’ll lose money is if the USA Government vanishes and goes bankrupt. *knocks on wood*
There are 2 types of federal bonds, EE series and I series.
EE Series bonds
These bonds are bought at a low price then they mature to a higher price. Example: You purchase a $100 EE series bond. You will pay $50 now (face value) and in 20 years it will be a value of $100 or more. The government guarantees the value will be double what you paid for in 20 years. Series EE bonds have a fixed interest rate that won´t change for 20 years (Currently 2.7% per month, in January 2024). It may change or stay the same until maturity at 30 years.
I Series bonds
These bonds are purchased at the same price as the face value. If you buy a $100 I series bond, you pay $100 now and then make more money as it matures. Once it matures with interest after 30 years, you will have more than $100 and the exact amount will vary. One of the main differences between I Series bonds and EE Series Bonds is the interest rate. I Series Bonds have a higher and fixed interest rate for 6 months (Currently 5.27% per month in January 2024). After 6 months, the interest rate can change. The interest rate changes every 6 months. This is why the amount you´ll have when the bond matures will vary. The government guarantees that this interest amount will never go below zero.
With both bonds, you can cash your bonds after 12 months. HOWEVER, you will pay a penalty if you cash the bond before 5 years (i.e. you´ll lose the last 3 months of interest). After 5 years, there is no penalty to cash your bond.
Pros of Federal Bonds:
It’s a safe option to save money without thinking about it. If you have some money that you want to start saving and you don’t want the temptation of easy access like a high yield savings account offers, this is a good choice. They are also tax-free if you decide to use it towards your first bachelor’s degree for your education. So parents, you can start buying some bonds right now! Once little Johnny or Susie is 18 years old and ready for college, they can use it to pay for their college education.
Cons of Federal Bonds:
You do receive a penalty if you cash your bond before 5 years and you must keep them for a minimum of 1 year. You must pay federal taxes (state taxes are exempt) on the interest received as well. The interest rates are very low but they never change for 20 years if you buy a fixed rate EE Series bond. Interest rates range from .1% to 10%. So it is important to buy EE Series bonds when they are at a high interest rate or buy a variable bond, I Series bond, that changes interest rates with the time. It’s your choice. Each have their purpose. I have had both and currently enjoy the I Series bonds. I can always earn a little more when the interest rates fluctuate. You can find more detailed information about bonds and securities on the US Treasury Direct Website.
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