Savings Bond Not Best Investment

You know you’ve got at least one, somewhere. Maybe it’s lying in a shoebox in your closet, or in the back of a desk drawer, or under the birth certificates and deed in your safe deposit box.

The U.S. savings bond, long a staple of graduation celebrations and other milestones, has become almost as common as a checking account in many homes across the country.

For years they’ve been touted as a great way to save money while giving Uncle Sam a financial shot in the arm.

But is that the case?

The sad truth about savings bonds is that, in the vast majority of cases, from a purely financial perspective they are not the best way to invest your money.

“We don’t normally recommend them,” said Robert Klosterman, a certified financial planner in Minneapolis.

Klosterman, the president-elect of the Institute of Certified Financial Planners, said the rate of return on bonds makes them a poor choice compared with other, equally safe products like money market accounts.

“I’m not a big fan of them because the returns are so low,” said Ray Forgue, associate professor of family studies at the University of Kentucky.

Forgue noted some other disadvantages to bonds, not the least of which is that they stop earning interest after 30 or 40 years.

Another factor is that it is difficult to say at any one time just what your bond holdings are worth, making it a problem when assessing the overall value of your investment portfolio.

What could be simpler than a savings bond?

A lot of things, actually.

When it comes to bonds, there’s more than meets the eye. Beneath their deceptively simple exteriors, you’ll find that the interest rates, maturity date and other important factors vary from bond to bond, depending on the date of issue.

“The biggest thing that we try to communicate to investors is that each bond is unique,” said Daniel Pederson, author of “U.S. Savings Bonds: A Comprehensive Guide for Bond Holders and Financial Professionals.” “They may look alike, they may say the same numbers, but they’re each unique.”

So unique that Pederson left his job as a supervisor of the savings bond division of a Federal Reserve Bank to start his own business explaining the ins and outs of savings bonds to investors.

The month and year of issue are the two primary concerns when looking at a bond. They will help to determine when the values of the bonds will increase.

Savvy bond investors can use the monthly cycles of interest accrual to their benefit, said Pederson.

For example, you should buy bonds as late in the month as possible - you’ll earn just as much interest as you would if you had purchased them on the first day of the month.

Cashing bonds presents its own unique challenges.

According to Pederson, Americans forfeit $100 million to $150 million a year by cashing in bonds at the wrong time.

To get the maximum return on your bonds, it’s a good idea to cash bonds in the months when interest is added to their value, said Pederson.

For example, a bond with an issue date of April 1990 increases in value the first day of every April and October.

You could cash the bond in at the end of September, and still receive the same amount as you would in April. If you wait until after the first of October to cash the bond, you will receive another six months of interest.

The month and year of issue will also let you know when the bonds will stop earning interest - after 30 years for E and EE bonds issued December 1965 and later, after 40 years for E bonds issued between May 1941 and November 1965.

So when are savings bonds a good idea?

“It’s a convenient way to invest small amounts of money,” said Klosterman. “It’s a beautiful thing for modest amounts.”

Klosterman said bonds can be a good stepping stone on the way to larger investments.

While recognizing the drawbacks of savings bonds, Pederson said some investors may still find a role for them, especially those who are especially conscious of risk.

“To me, savings bonds should be considered at the conservative end of an investment portfolio,” he said.

And there may be advantages that go beyond the purely financial.

Forgue said savings bonds are a good way to teach young children the benefits of saving and investing. The bond is physical proof of saving, he said, unlike passbook-less bank accounts.

There are also tax advantages to using the bonds to save for educational expenses, although Forgue said other methods of saving for college might be preferable.

One handy source for just about everything you’d ever care to know about U.S. savings bonds is the Bureau of the Debt’s Web site at http://www.publicdebt.treas.gov

There you’ll find a wide of resources and information, ranging from a tally of the current public debt - down to the penny - to a program you can download that will allow you to calculate the value, interest rate and maturity of your bonds, and print out a record of your holdings.