Saving Bonds
Financial literacy

How Do Savings Bonds Work?

When people start making financial investments with their money they usually want to find something that has a low-risk profile and a steady rate of return. After all, it’s a good idea to start with something stable that will provide guaranteed income over a long period of time.

There are a lot of options out there for you to choose from, and you should consult with a financial planning adviser before beginning your investment journey. A popular option for a risk-averse investment opportunity for first-time investors that a good financial adviser will most likely provide you with is a savings bond.

In the United States savings bonds are issued by the federal government. Other countries and governments may also issue this type of bond. Savings bonds are categorized as a safe investment as they are guaranteed by the government. If the government is stable, then your savings bond will also be safe.

Savings bonds are a great option if you want to take that first step toward creating a better financial future for you and your loved ones. If that sounds like you, or you are interested in learning more about saving bonds generally, then this is the article for you. Let’s start by taking an overview of what exactly saving bonds are.

What are Savings Bonds?

Savings bonds are designed to help the government raise funds for its borrowing policies. As such, savings bonds act as a way for the state to borrow money from its citizens (and other investors) at a preferential rate of interest. 

That interest rate is also guaranteed for people who have invested in a savings bond and is usually characterized by a long-term length, in many cases up to 30 years, which provides a stable foundation for an investment portfolio. The interest on savings bonds is also compounded, meaning that you earn interest on your interest.

Savings bonds are sold at face value, i.e., a $100 savings bond is sold for precisely that figure, meaning that they’re easy to understand. Thanks to their longer term and a high degree of stability, savings bonds also make an excellent choice for investors wanting to ensure that they can enjoy a comfortable retirement with their money. The comparative downside here is that saving bonds have lower rates of return on their original investment than other options.

It’s also important to emphasize that while savings bonds are very stable in the United States, they are only as stable as the government that issues them. Savings bonds issued by countries wracked by economic instability, like Lebanon or Argentina, are not likely to have reliable long-term investment prospects. With all that being said, let’s check out how savings bonds work in more detail.

How Do Savings Bonds Work?

Savings bonds generate money via accrued interest which is also subject to compounding and thus accrues over a given period of time. It’s important to note that even if interest on a savings bond builds up over time, it is not released until the bond is redeemed. 

Most savings bonds are non-refundable and can only be redeemed by the original owner after their maturity term expires. However, if it’s a paper bond, it can be redeemed directly from the government or through a financial institution.

Maturity is an important term used in connection with savings bonds. This refers to the time when the full term of the savings bond has expired, which could be any predetermined length of time; however, as mentioned earlier, 30 years is the most common. When your savings bond has matured, you will be repaid the full amount of money that you invested in your savings bond plus your compound interest.

As U.S. savings bonds are tax-deferred, you don’t have to pay taxes on your invested money while you accumulate interest. Taxes are only due at redemption or when the bond is cashed in, which in most cases is at the end of the maturity period.

Throughout the bond’s existence, you can choose to declare interest as it is generated, but you won’t be responsible for paying taxes until the bond is cashed. At this point, the sum you’ll receive as a return on your original money investment could be considerable.

What Are the Different Types of Savings Bonds?

In the United States, the federal government currently offers two key types of savings bonds, namely Series EE Bonds and Series I Bonds. In rare cases, some individuals may still hold policies in older bond formats, which we will cover in briefer detail.

Series EE Bonds

EE bonds are the most conservative option you can select with the US Treasury and this savings bonds currently offers an interest rate of 2.70% on bonds issued from November 1, 2023, to April 30, 2024. They are electronic only, earn interest each month, and last for 30 years. The government guarantees that this bond will double in value in 20 years and will top up your investment if interest rates fall during that period.

Series I bonds

The Series I savings bond’s interest rate is adjusted every six months in accordance with inflation. Both a pre-set fixed rate and the rate of inflation are used to establish the overall rate. There is never a change in the set rate. Every six months, both the inflation rate and the total rate are reset. This bond is also set for 30 years and can offer higher returns than the Series EE, with a concurrent risk of lower returns on your original investment as well.

HH Bonds

This type of savings bonds was eliminated in 2004, which means that 2024 is the last year that these bonds can mature. As such, if you have one of these bonds, check with your financial adviser as you could be coming into money soon.

Other Historical Bonds

The US government has offered various other bonds throughout its history, particularly during the World Wars, where they raised millions to fund the American military. Other types of historical bonds include post office bonds and patriot bonds.

The Pros and Cons of Savings Bonds

What Are the Pros of Savings Bonds?

Savings bonds make an excellent investment for people wanting to take their first step toward a healthy and diversified financial portfolio. It would be fair to say that when considering the pros and cons of savings bonds, the positives outweigh the negatives and savings bonds are good value for your money

  • Savings bonds can be bought for as little as $25, and you can also make purchases at a significantly higher level. This provides a great degree of flexibility regarding how much money you want to invest.
  • You’re pretty much guaranteed a return on your original investment as saving bonds are backed up by the federal government. The only reason we added ‘near’ here is out of an abundance of caution.
  • You only pay federal income tax on your savings bonds, which means no state or local taxes. This is particularly attractive to people living in high-income tax-affected states like Illinois and California.
  • Interested in studying at a higher education institution at some point in the future? It might surprise you to know that savings bonds can be used to pay for your educational expenses.
  • Savings bonds are ultimately a patriotic investment in the future of your country and its citizens. They’re a win-win; you get a reliable investment that will provide you with a solid rate of return while helping your country improve its economy and its public services.

What Are the Cons of Savings Bonds?

Nothing in life is perfect, and money isn’t free. Investments are usually highly specific, meaning there’s no perfect catch-all investment you can make. 

Savings bonds make for a great investment, it’s true, but they’re not perfect. That’s why you should always consult a financial adviser before purchasing savings bonds. Here are some of the most notable cons you should remember before spending your money.

  • Savings bonds are a significant long-term investment that tie you into a long maturity period, meaning that you won’t be seeing a return on your money anytime soon. Those looking for a quicker return should look for another type of investment.
  • If you do decide to cash out your savings bonds earlier there are penalties to consider. Current US bond policy is that you lose three months of interest if you cash out during the first five years, so be careful or you might lose out on money.
  • Yields on savings bonds are often lower than those on other alternatives. For example, Series I bonds released last year had a 4.3% rate of return, and for Series EE bonds, it was 2.5%. If you want a higher rate (and a higher risk at the same time), don’t go for savings bonds.
  • If bond buyers are unable to take advantage of the Series EE bond’s unique 20-year privilege, they will be able to earn more money from savings accounts. As such, you should carefully consider whether this is the right investment for you.

How to Choose Savings Bonds

Choosing between the two major savings bonds currently offered by the US federal government, the Series I bond and the Series EE bond, can seem complicated given how similar they may appear. The key benefits of investing in either of them are almost identical, as is their maturity period; where they differ is how they function technically and thus make money for you.

Series I bonds, with their inflation-adjusted return, safeguard the investor’s purchasing power during periods of high inflation. On the other hand, Series EE bonds offer predictable returns with a fixed interest rate and a guaranteed doubling of value if held for 20 years. As such, the major difference between the two is that the former is more prone to market fluctuation with all the risks and benefits that entails, whereas the Series EE bond will provide more stability in the long term.

There are also some differences and restrictions on how much money you can use to purchase each type of bond. This may determine which type of savings bonds you choose to invest in, based on what cash you have available.

When it comes to Series I bonds, you can start with a minimum purchase of $25, which can also be bought in penny increments. You can purchase paper I bonds in denominations of $50, $100, $200, $500, and $1,000. 

As for Series EE bonds, you can buy up to $10,000 in electronic EE bonds each year. Standard EE bonds can also be bought for a minimum of $25 and are also available in penny increments.

How to Cash in Savings Bonds

If you decide that the time has come for you to cash in your savings bonds (and you must hold savings bonds with the US government), then there is plenty of information online that will support you. Before proceeding with the cashing-in process, however, you need to ask yourself whether this is the right time for you if you’re doing this before the maturity term has expired. 

Remember, you could be losing out on the original money you invested. With all that being said, if you decide that the time has come to close your policy, then these are the steps you need to take.

Electronic EE or I savings bonds

1) Go to your US Treasury Direct account and check how much your savings bond is worth under the current holdings tab.

2) Choose how much you wish to cash out. Please note that this can only be done in increments of $25.

3) Go to the Manage Account tab and access the link for cashing securities.

4) Wait to receive your 1099-INT form, which is required for tax filing and should arrive in January of the year after you cash in the bond.

Paper EE or I savings bonds

1) You can only cash a paper bond for its whole value; however, you can cash as many savings bonds as you like at any given time.

2) You will need to contact both your bank and the US Treasury to initiate the cashing process. You also need to submit a FS Form 1522 form via your Treasury account.

3) Wait to receive your 1099-INT form, which is required for tax filing, which should arrive in January of the year after you cash in the bond.

4) The paper cashing process is more complex. As such, we recommend you consult the US Treasury’s website for more information.

Prepare for Savings Bonds with PocketGuard

If you’re interested in investing in savings bonds, then the first step you should take is controlling your day-to-day money, and you can do that by signing up with PocketGuard. Our budgeting app allows you to ensure that your money is working for you by covering your routine expenses and outgoings. Once you’re not wasting the money in your pocket, you’ll be able to start investing in savings bonds.

Don’t delay; sign up today to ensure a financial future where your money works for you. Send us a message via our contact form, and one of our customer support agencies will get back to you with more information. By taking action now, you’ll be able to put your hard-earned money into savings bonds that will help ensure a comfortable future.


Oleksandr graduated from Dnipro National University of railway transport in Ukraine. At first, he was a customer success manager at PocketGuard and in 1.5 years has been promoted to product manager....

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