US Savings Bonds

Archive for September, 2007

Question: What is the best way to invest savings bonds?

My kids have well meaning grandparents who send savings bonds for birthdays and holidays and I have no idea what to do with them. I have thought about putting them in a mutual fund at some point. Does anyone know what amount of money you have to have to start one up?

Answer: Most Mutual Funds require minimum amounts of around $2,000 to $3,000 to open an account. If you’re thinking of redeeming the savings bonds and using the money to open a mutual fund account, beware of the early redemption penalty on the bonds (3 months interest). And they cannot be redeemed until they are at least 12 months old. If your kids are under 18, the mutual fund company will want you or another parent to sign the account papers, since the kids won’t be old enough to enter into legal contracts themselves.

If the savings bonds are small amounts (like $25 or $50), and the total is nowhere near $2,000 or $3,000, there’s nothing wrong with just letting the savings bonds accrue interest. While the interest rates aren’t high, they are reliable (because the U.S. government stands behind the bonds). In 15 years time, they’ll probably compound into a nontrivial value. Remember the power of compounding (see the webpage listed below). Maybe the bonds can help the kids cover their college expenses.

Bond Market : How Do Saving Bonds Work?