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Should I Cash My Savings Bonds?

by The Happy Rock on May 11, 2009

bond-savings-college-posterShort answer = Yes.

Let’s start with the basics first though. A US savings bond is note representing a US government debt. The government agrees to pay back the money you give them in exchange for interest paid to the bondholder when you redeem the bond. Currently in 2009 the savings bond rates are 0.70% and 0.00% for EE and I bonds respectively, so that makes them terrible investments right now.

Know that you know what you are dealing with, take them to the bank and get the bond value plus their accrued interest.

There are a few things to note:

  1. You will pay taxes on the income/interest) portion of the cash you get back.
  2. You have to wait 12 months from the date of purchase before you cash them.
  3. If you cash them before 5 years, you will forfeit 3 months of interest.

Even with those three negatives, it still makes sense to cash them.  When you do, I would personally use the money to get rid of debt.  The interest savings on your debt alone is usually enough to justify bond redemption, but I would also that there are much better investment vehicles than bonds too.  So hunt down those bonds from your childhood and cash them up.

{ 8 comments… read them below or add one }

Michael Harr @ Wealth...Uncomplicated May 12, 2009 at 12:28 am

Whoa, whoa, whoa…careful not to sell I Bonds from years past that pay a healthy fixed rate. Even though they won’t yield much in the near term, they’re an excellent long-term instrument to fill out emergency funds or for cash allocations in longer-term portfolios. While you might get a few percentage points over the next six months or year (depending on when inflation returns), you’ll likely be better off holding onto the bonds over the next several years.

As for the other bonds…you bet, sell ‘em all. They have horrible yields and better metrics can be accomplished buying treasuries or corporate bonds (these have been very attractive all year long).

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brainy May 12, 2009 at 6:12 am

I’m going to have to disagree on this one.

It all depends on when you bought them — I’ve got I-bonds that are earning over 6% right this minute. There’s no way I’d cash those out now!

At the same time, like you mentioned, the rates right now are terrible so I’m certainly not planning or suggesting that anyone should invest in them right now (at least until the next rate update in November.)

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Neil May 12, 2009 at 7:57 am

Hi

I agree with this advice, and it should apply to any sort of investment that you hold (i.e. you should be constantly reviewing its performance). In relation to paying off debt, it is very hard to justify any investment other than your pension if you are paying interest on debt. Once the effect of paying tax on earnings from your investments is taken into account it is very unusual for an investment made to outperform a debt reduced.

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The Happy Rock May 12, 2009 at 11:45 pm

@Michael and brainy – My point is that selling bonds regardless of what interest rate they have is still a most likely a good idea. Most people hold bonds and pay a lot more than 5% interest on debt, so mathematically selling bonds usually makes sense. Now if you don’t have debt and you have 6% bonds, I might reconsider.

@Neil – I agree and that doesn’t even factor in the non money side to debt destruction like, freedom, lower stress, etc.

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Shibuya May 13, 2009 at 5:10 am

I have always thought that CDs were better than savings bonds anyway. Right now with the interest rates being what they are, I can’t recommend not casing them in. Thanks for this information.

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Sue May 13, 2009 at 6:28 pm

Hi Happy Rock,
I recently recommending selling savings bonds with some caution.
http://motherhood101aplus.blogspot.com/2009/03/savings-bonds-that-have-matured.html
“EE and I savings bonds earn interest for 30 years. HH savings bonds earn interest for 20 years.
Please check http://www.treasurydirect.gov prior to cashing in your savings bonds. Click on the get started link. You can also check when the next accrual period is on the bonds. You still may decide to cash the savings bonds in but try waiting until the next accrual period has passed.
An EE bond issued in 1984 for $50 (face value)would be worth over $90. The bond still accrues interest after the maturity date.”

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MMA Bart June 5, 2009 at 4:34 pm

I think what Micheal said above is important – don’t sell your I bonds. I have several and they are a solid investment. As for other bonds – I agree in part. If you’re in debt, it makes sense to pay down a 25% APR credit card bill instead of fighting to make 2-3% in bond.

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Jonathan@Friends&Money November 17, 2012 at 3:21 pm

Very insightful post, short and succinct. Bonds are always a good investment especially in turbulent times

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