Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

savings bond calculator

saving bonds traderAs we have already seen, a bond is an IOU, issued by a corporation, government, or government agency which is your guarantee, your receipt if you like, that will be honoured when you want to cash in your savings bonds to the issuer. As such it is a relatively low risk form of investment. In return for providing them with your hard earned cash, you are rewarded in the form of interest payments.  Now compared to other forms of investment the returns may be relatively modest, but in general they will be higher than in a regular deposit account. So it does beg the question, as to why you would bother investing in saving bonds at all. Let me try to answer the question with some simple examples, which I hope will give you a feel for when they are appropriate as an investment vehicle, and also when they are not, and I hope the following will give you your own savings bond calculator.

saving bonds interest

Savings bonds are certainly a safe place to save money, but you want to be sure that you are putting your money into bonds for the right reasons. It is important to remember that although you will be achieving a higher interest rate than in a regular deposit account, you must bear in mind that saving bonds are generally longer term investments. If you need access to the funds quickly, or in the early stages of the investment, then you may well forfeit any benefits gained and possibly incur some early redemption penalties. So let's look at some typical examples which I hope will help you to decide whether these are suitable for you and your personal circumstances.

Now it's a sad fact of life that savings bonds are rarely recommended by financial advisors, for the simple reason that they are not paid any commission on the products! Ask 50 financial advisors whether stocks or savings bonds are the better investment for the long term, and all those earning commission on stocks will tell you stocks are always the better investment in the long term. Let's take a look and see if they are right. For the example I have used a US bond against an index fund which is a basket of stocks across broad markets. 

saving bonds chartThe chart on the left shows the performance of the fund against one type of US savings bond over a ten year period from 1998 to 2008. Now the reason I have shown it, is simply to make the point, that it is possible for savings bonds to outperform the stock market, whatever you may have been told. However, please don't run away with the idea that this will always be the case - it won't. When the stock markets are in a bull phase then they will outperform a savings bond. I have shown it to simply make the point that saving bonds can perform very well - they are not the 'boring' low return investment that you may have been led to believe. All I am saying, is please approach them with an open mind - in turbulent markets many investors turn to them to avoid the volatility swings associated with traditional stock market investments.  So if we look at them as safe long term low risk investments, when should you consider them as a place to save for the future. My suggestions in very broad terms are as follows :

Married or single 20 - 30 year olds Probably not an appropriate investment as spare monthly cash is unlikely to be available, and any that is may be required at short notice. In addition with the possibility of children, and the possible loss of one income temporarily, this is a tough time to save and invest for the long term.
Singles or couples 30-40 with a small family Once children start to arrive it is certainly an investment that should be considered in two areas. Firstly they can be bought in the child's name, providing an excellent start in life. Secondly it is time most parents have to start thinking about the cost of education. Again a good time to start investing for the future
Mature singles and couples 40-50, family leaving home Children are starting to finish their education and start to leave home ( hurrah!!) The over 50's tend to have more disposal income than any other group. By all means enjoy it, but why not invest for a comfortable retirement with some saving bonds. If you have a portfolio of stocks, add some bonds to balance the risk profile with lower risk investments.
60's and over Enjoy your retirement, and any saving bonds coming to maturity may be needed for the grandchildren!!
60's - 70's Too late to start really - but those bonds which are reaching maturity will be useful for your long term health care

Now the above is only a very rough guide and it is impossible to give hard and fast rules. I hope the above helps a little, and gives you some ideas on the period of your life when a savings bond can be considered as an alternative investment vehicle, but please remember these are typically long term. Again as a rough guide you should typically have a ten year time horizon for savings bonds.

Finally one other piece of advice when you are considering using savings bonds as part of your portfolio. A popular rule of thumb for a savings bond calculator, is to subtract your age from 100 to arrive at the split between stocks and bonds. The difference represents the percentage of stocks you should keep in your portfolio. So for example, if you are age 40, 60% (100 minus 40) of your portfolio should consist of stock. However, you may want to modify the result after considering other factors, such as your age, risk tolerance, and financial goals. Remember this is only a general rule for guidance. All it says in simple terms is that the older you are then the less of your portfolio should be in stocks, and more in bonds as a percentage.

OK - now let's look at some of the basic terms and terminology of the savings bonds market. Some terms are common to bonds in different countries, others are not, so I have broken them up into each country with an explanation of each term

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