Benefits and Drawbacks to Savings Bonds

The largest benefit to savings bonds is the assured return; it is unlikely that the government will fail to make payments on savings bonds due to the fact it retains the ability to tax its citizens and print more money if the need arises. Unfortunately, due to the low risk of savings bonds, the yield is substantially less than other investment types, but the value is certain to be paid back.

Penalties and Withdrawal Requirements

US savings bonds have hefty penalties for withdrawals within the first 5 years. For this reason, short term investors should instead look into CDs and other investment types before committing to buy a savings bond. Likewise, the interest payments on US savings bonds are paid semiannually, thus withdrawals should be made immediately after the interest payment. Waiting any amount of time after the last interest payment results in a lowered return, as the months before an interest payment will not be paid until the semiannual distribution. Why let the government make free use of your money for four months, when you could have had that cash in hand after the last disbursement and utilized the returns however you please?

Long Term Investment with Tiny Yield

If you have enough time to make an investment in savings bonds a rational choice, you're probably better off investing in other vehicles. Savings bonds cannot be cashed in before five years; if you're thinking about locking money up for five years, your money would be better invested in a corporate bond mutual fund. You'll be on the riskier side, as corporations do fail, but the chances of default are by far outweighed by higher yields on your investment. Consider even a money market account that is federally insured and will return a rate that is about equal.  With a money market account, you'll get access to your investment whenever you'd like with no early withdrawal penalty.

Worried about Inflation?

This is where savings bonds get a chance with other investments. Series I US savings bonds are adjusted for government inflation statistics. Your savings bond is guaranteed a yield, along with a cushion for inflation.  The government determines overall inflation and adds that percentage to your yield. For instance, a Series I savings bond with a yield of 2.5% per year and 3% inflation would yield 5.5% per year. Of course, the value of your investment is also devalued by 3% due to inflation, but you're still pocketing 2.5% per year in profit after higher expenses. The Series I savings bond is a great way to invest and know you're always beating the fall in spending power; the problem is that the government is calculating inflation with their own methods, which means you might get shorted a bit on the inflation adjustment. Either way, beating inflation is the ultimate goal of investing, so in periods of high inflation, consider a series I savings bond.

The Long and the Short of Bonds

If you have a substantial period of time where you can make full use of a savings bond and aren't concerned about overall return, go for a savings bond. But if you want to grow your wealth and produce results over a long period of time, savings bonds are a dull investment. The stock markets have returned about 10.5% per year on average, while savings bonds sit at a few percentage points per year, perhaps 3-4%. There is a huge differential between the end return of a 30 year savings bond and a decent mutual fund.