Series I & EE U.S. Savings Bonds

In 2005, while listening to one of my favorite radio talk-shows (which has since been discontinued from my free local FM radio, but continues strong on the internet), I learned about a type of investing vehicle that seemed… well, like a no-brainer. As a conservative investor (aka, "chicken"), my tolerance for risk isn’t very high. After doing some more in-depth research on this type of investment, I jumped all over it. At the time, I was preparing to sell my first house near the top of the real estate bubble and cash in. After selling my house and making a good chuck of change, I invested what I had earned into 3 different types of holdings; first, I re-invested into real estate, second, I augmented my precious metals holdings, and finally, I began investing in U.S. Savings Bonds.

U.S. Savings Bonds were new to me at the time, but they caught my interest with their government-backed conservative features. The types of bonds I purchased back then were two types. Series “I” bonds and series “EE” bonds. Here are their at-a-glance bulleted highlights:

Series I Bonds:

General Facts:
* The “I” in I Bond stands for “Inflation”
* Their earnings rate is based on both a fixed rate and an inflation rate (CPI)
* They increase in value monthly and the interest is paid when you liquidate
* They are an accrual-type security
* They are sold at face value; i.e., you pay $50 for a $50 I Bond
* They grow in value with inflation-indexed earnings for up to 30 years
* Fixed rates are announced each May & November
* Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
* Up to $5,000 worth of I Bonds may be purchased per SS# per year
* Interest compounds semiannually for 30 years

Pros:
* They are electronic holdings, so they’re 100% manageable online
* In amounts as little as $25 each, they are extremely affordable
* They can be liquidated penalty-free after only 5 years
* They earn interest from the first day of their issue month
* When interest rates are high, I Bond yields go up
* The fixed rate of each I Bond remains the same for the life of the bond
* Composite rates never go below zero
* They are exempt from state & local income taxes
* Tax benefits are available when used for educational purposes
* Unlike other securities, minors can own U.S. Savings bonds

Cons:
* If liquidated before 5 years, the 3 most recent months interest are forfeited
* As semi-long-term investments, they can tie-up money for 1-30 years.
* They must be held for a minimum of 12 months
* When interest rates are low, I Bonds yields go down

Series EE Bonds:

General Facts:
* They increase in value monthly and the interest is paid when you liquidate
* EE Bonds issued after May 2005 earn a fixed rate of return.
* They are sold at face value; i.e., you pay $50 for a $50 EE Bond
* Fixed rates are announced each May & November
* Up to $5,000 worth of EE Bonds may be purchased per SS# per year
* Interest compounds semiannually for 30 years

Pros:
* They are electronic holdings, so they’re 100% manageable online
* In amounts as little as $25 each, they are extremely affordable
* They can be liquidated penalty-free after only 5 years
* They earn interest from the first day of their issue month
* The rate of each EE Bond remains the same for the life of the bond
* They are exempt from state & local income taxes
* Tax benefits are available when used for educational purposes
* Unlike other securities, minors can own U.S. Savings bonds

Cons:
* If liquidated before 5 years, the 3 most recent months interest are forfeited
* As semi-long-term investments, they can tie-up money for 1-30 years.
* They must be held for a minimum of 12 months

Using my own “LYDS” rating criteria, and on a scale of 1 to 10 (10 being the best), I give series I and EE bonds a general 7 out of 10 (70%). Here’s the breakdown:

Liquidity: 7 (although you’d lose the 3 most recent months worth of interest for doing so, you could liquidate your I and EE bonds after only 12 months of their purchase date if you had to)

Yield: 3 (Interest rates for EE bonds are fixed once they’re purchased, which is good, but they’re very low yielding investments. Good for long-term, and definitely NOT an aggressive investment. I bonds are much more volatile being integrally linked with the CPI, but they are completely at the mercy of the Fed’s whims for interest rate changes.)

Duration: 9 (Having the ability to liquidate after just 12 months with minimal penalties is attractive. Having the option to liquidate penalty-free after 5 years is also reasonable. And having the option to long-term invest over a maximum of 30 years is phenomenal).

Seed: 9 (Both series I and EE bonds are extremely affordable at only $25 minimum each - easy and legal enough for kids, in fact. The fact that one can invest up to $5,000 per year might be a little bit too restrictive for some, but generally adequate for most).