Savings Bonds Explained: When to Buy, When to Cash In, and If They’re Still Worth It

8:25Sean Pyles:Kind of similar to what you mentioned around having different values, I've learned that flexibility and independence are really important when traveling with a group and so is knowing your strengths. I can use my recent trip to England with my friends as an example here. So we went on this trip with my college friends to England to tour various gardens and also to go see one of my favorite bands, the Scissor Sisters in concert. And I went on the trip with one of my good college friends who is really organized and is a kind of encyclopedia of various gardens around the world, especially in England.

8:54Sean Pyles:So she did this great job of cataloging various gardens, and that was a huge help in just the logistics of our trip. And I love to drive. I am kind of the default driver of the friend group, so I was able to weigh in on what might be a reasonable driving itinerary. I booked the rental car, and then I did the actual driving. And between my friends' ideas of various gardens to go to and what I thought would be a reasonable route for us to take. We had some compromises on like which gardens we could actually hit, which ones we weren't going to be able to see and would maybe get to next time. And just because we know each other so well and we mesh so well as people, we were able to have that sort of open conversation and figure out the details in like a really harmonious way.

9:33Sean Pyles:And that just speaks again to our relationship and how good that is. And then around flexibility and independence, before this became a huge garden tour vacation, It was all about that Scissor Sisters concert. I bought tickets to the show just assuming we're all going to go. And when we were planning this vacation, my friend was like, actually, you know, I'm not really big on huge concerts. They can be a little overwhelming. And I totally get that. You don't have to do everything together all the time. Maybe you don't want to go to this museum or you just want to sleep in one day. That's totally OK.

10:06Sean Pyles:I think it's really important to communicate those boundaries, whether it's a personal boundary or a financial boundary. so you don't feel pressured into doing something you really don't want to do, which can cause you to resent your friends.

10:16Elizabeth Ayoola:So, Sean, what you just said reminds me of a story of when I was in Majorca on that trip with my friends, and everybody wanted to go to the club. And honestly, I didn't really want to go. I was drained from spending all day with my amazing friends, and I wanted some quiet time. But I went anyway because of peer pressure. And in the middle of the clubbing, I just left. I literally sped walked home and went to bed. Just ghost your friends? I ghosted my friends and everyone's like, where is Elizabeth? Where is Elizabeth? Elizabeth went to bed.

10:45Sean Pyles:I'm all for an Irish goodbye. But when you're out at the club, you got to communicate to your friends to make sure that they know you're safe. So not in a foreign country. Yes. And in a foreign country.

10:56Elizabeth Ayoola:But obviously I have learned to communicate better and, you know, just say no to activities I don't want to do. And it has made friendship trips a lot more harmonious.

11:04Sean Pyles:That is a solid piece of advice. Okay. So we are going to bring in our surprise guests, the hosts of NerdWallet's Smart Travel podcast, Sally French and Megan Coyle. Welcome to Smart Money. Hello. Thanks for having us. I hope you've been enjoying eavesdropping on this conversation so far. This has been the greatest. It's been fascinating. This meeting of the podcast minds, we're all here together for the first time. Well, since you guys are such big travel nerds, I'd like to hear how you guys approach traveling with your friends in terms of like just being people traveling together and also financially?

11:37Sean Pyles:Yeah, well, Elizabeth, I have to say your story about your friendship kind of not ending out so hot at the end of your trip, it speaks to me. And it really made me realize that there are some people who are your best friends in your hometown where you live together and function on a daily basis, and they are not good travel companions. But it goes the other way. There are some people who I'm like, you're not like my best friend, but you're an amazing travel companion. It's really interesting to see those differences.

12:03Elizabeth Ayoola:Oh, I love that, Sally. I've never thought about it that way. And honestly, as an adult now, I want to do another friendship travel, but I'm also a little bit traumatized because I think it's so intimate to stay with someone for that many days, right? And what if you guys drive each other insane? But then like you said, Sally, what if you love each other as travel buddies?

12:21Sean Pyles:Yeah, you know, it's like dating. It's like some people are incompatible as a partner in dating, but they're like a fine friend. And then some people are incompatible travel companions. One of my friends and I were saying someone should make an app where you just like Tinder swipe, but to find someone to travel with. So free idea for any smart money listeners out there. That's a free startup idea. I don't know if I would trust a stranger on an app to travel with. What if they murder me?

12:45Elizabeth Ayoola:I know. Oh my God.

12:48Sean Pyles:Okay, Megan, what about you? How do you travel with friends? Oh man, I've done it all. I've done like the one trip with your one best friend and we are still friends to this day. So that worked out. I've also done those giant group trips with all of my college friends. And something resonated with me that you said, Sean, sometimes you plan a trip around a big event and then it turns out like not everyone is interested in said event or something like that. So one thing I've found that works really well is just giving everyone the itinerary pretty early. It's like the person who cares the most about the event sends out like, okay, on this day, we're going to do this.

13:23Sean Pyles:For me, recently, I went to Chincoteer with seven of my friends. So it was a big group. And we really wanted to do a boat day where you go see all these towns on a boat tour. And some people said in the group chat, they were like, you know, I can't afford that. That's really not in my budget right now. And the good thing was we planned this early enough that they were able to plan other things to do that day that were just as exciting. Like one of them hiked from every single town from the one most south to the one on the most northern end and had an amazing day. So that would be my tip for groups that are going together is get that itinerary out early so people can make other plans.

14:00Sean Pyles:And also I'll add that one of the best companions that you can bring on a group trip is a good book because if you don't want to go out for your friends that day, you can just hang out and chill, read a book and not spend a bunch of money on whatever you don't want to be doing. Absolutely. Well, Sally, Megan, thank you so much for coming on Smart Money and sharing your travel tips with us. And if folks want to hear more travel tips, they should listen to our Smart Travel Podcast, which is fabulous. It is wherever podcasts are found.

14:26Elizabeth Ayoola:Our pleasure. Thanks for having us. See you guys. Bye, guys. Up next, we talk about whether savings bonds are good investments.

14:34Sean Pyles:But before we get into that, it's that time of the episode where we ask you to send us your money questions, because that is what the show runs on, after all.

14:42Elizabeth Ayoola:Maybe you are thinking about traveling with friends and want to know how you can budget for that. Or maybe you're thinking about how you can save money on upcoming holiday travels. Whatever your money question is, we nerds are here to help you. Leave us a voicemail or text us on the nerd hotline at 901-730-6373. 901-730-NBRD.

15:02Sean Pyles:You can also email us your questions at podcast at nerdwallet.com. And a reminder that we want to help you with your budget. If you want us nerds to poke around in your budget and give you some tips and strategies, head over to the episode description and click on the link to fill out the Google form.

15:16Elizabeth Ayoola:All right, let's get to this episode's money question segment. That's up next. Stay with us.

15:24Sean Pyles:The following is a paid sponsorship, not an endorsement by NerdWallet's editorial team. Today's episode is sponsored by Bilt.

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16:46Sean Pyles:Today's episode is sponsored by Rula. Finding a therapist is hard enough, but finding one who actually takes your insurance, that's where most online therapy platforms fall short. Many don't work with insurance at all, which means you're stuck paying the full cost out of pocket or paying for an expensive monthly subscription.

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17:23Sean Pyles:Rula isn't just affordable. The experience is tailored around you. Other online therapy platforms might match you with the first available provider, whether or not they're the right fit. Rula considers your goals, preferences, and background to provide you with a curated list of licensed in-network therapists who are actually aligned with what you need, because they know that finding the right therapist can make all the difference.

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18:35Sean Pyles:That's R-U-L-A dot com slash smartmoney. You deserve mental health care that works for you, not against your budget. We're back and answering your money questions to help you make smarter financial decisions. This episode, we have a couple of questions about bonds from our listeners. We've been hearing more from our listeners about bonds lately, so we wanted to use this as a chance to do a little Bonds 101, as well as answer our listeners' questions. So to help us on this nerdy journey, we're joined by investing nerd and friend of the pod, Sam Taub. Sam, welcome back to Smart Money. Thanks for having me on again.

19:07Elizabeth Ayoola:Sam, let's start from the T.O.P. from the beginning. Can you give us a quick explanation of what a bond is?

19:13Sean Pyles:To start from the T.O.P., a bond is basically an IOU. you. When you buy a bond, you're loaning someone, often a government or a corporation, your money, and the borrower pays you back, often with interest, over a set period of time. Bonds are an example of fixed income investments because the terms of the loan are fixed. If you hold a bond to maturity, that is until the borrower is done paying you back, you know exactly how much you'll make off of it in both dollar and percentage terms. And there are a variety of types of bonds. Can you run us through a few of the most popular ones? Treasury bonds are loans to the U.S.

19:55Sean Pyles:government, which is one of the most trustworthy borrowers in the world just due to the sheer size of our economy. Treasury bonds trade on a market just like stocks, meaning you can buy or sell them at any time. You don't necessarily have to wait until maturity. Savings bonds are also loans to the U.S. government, but they are non-marketable, meaning you can't sell them before maturity. Many savings bonds have a provision that allows you to cash out early, but this usually means forfeiting some amount of interest. It's kind of like a CD in that regard. Income from both treasury bonds and savings bonds is exempt from state and local taxes, but it is federally taxable.

20:38Sean Pyles:So those two are bonds that are issued by the federal government, but municipalities can also issue bonds as well. And those are muni bonds, right? That is correct. Muni bonds are, as you said, loans to state or local governments. Like treasury bonds, they trade on a market so you can buy or sell them before maturity. Now, muni bonds are a little riskier than treasury or savings bonds because unlike the U.S. government, municipalities do sometimes go bankrupt and default on their bonds. but that extra risk can also mean higher yields. Plus, muni bond income is exempt from federal taxes. If you live in the same state that a muni bond was issued from, it's usually exempt from state and local taxes as well.

21:26Elizabeth Ayoola:And then can companies offer bonds too? Tell me how those work.

21:30Sean Pyles:Yep, those are called corporate bonds. Those also trade on a market and like muni bonds, they're a little riskier because companies do sometimes go out of business and stop paying. But as with munis, that risk can mean higher yields. And corporate bond income, generally speaking, is fully taxable. And when it comes to federal bonds, we often hear things like the yield on the 10-year treasury is X percent. Can you explain what that means for us in plain language? Usually when people talk about bond yields, What they're referring to is yield to maturity, which is a bond's annual percent return if you buy it and hold it to maturity.

22:13Sean Pyles:That depends on the face value of the bond. That is the amount that you'll get when the bond matures. And it also depends on the purchase price of the bond and also on the coupon rate or annual interest rate if there is one. Most bonds are traded on a market, just like stocks. And typically, you buy a bond at a discount for some amount less than its face value. And the bigger the discount, the higher the yield. Now, some types of bonds, such as short-term treasury bills, are zero-coupon bonds, meaning they don't pay interest. In that case, the yield is just based on the face value, the discounted purchase price, and the number of years to maturity.

22:59Sean Pyles:Can you talk about what might make a yield go up or down in the bond market? I'll use an example of something that makes yields go up. If something freaks out the bond market, a recent example being the U.S. government credit rating downgrade, that tends to make people sell bonds, which lowers their purchase prices and thus increases their yields. That's why when investors say things like, the 10-year treasury yield just shot up to 5%. They're saying that as a bad thing. When yields suddenly go up, it usually means that investors have lost some degree of confidence in the borrower's ability to repay.

23:41Sean Pyles:And the 10-year treasury bond yield going up to 5 % is bad for the government, but it can be good for people who buy the bonds, right? Because you're getting a better return on the bond. That's correct. Even after the recent downgrade, the U.S. government still has an extremely high credit rating, and a default is still considered extremely unlikely. So for the individual investor, it just means a higher yield, which is good. Now, it's probably worth noting here, it's bad for the country because higher yields mean the government has to pay more interest, and that could eventually force us to cut spending and increase taxes just to afford the interest payments.

24:23Sean Pyles:But that's kind of a later problem that individual investors can't really do much about. We'll just keep kicking that can down the road.

24:34Elizabeth Ayoola:Now we understand the basics of bonds. Tell us, Sam, how can we fit that into our investing strategies?

24:41Sean Pyles:Since bonds are fixed income, since you know exactly what your return will be at the time of purchase, bonds provide a level of certainty that other types of investments like stocks don't have. Longtime listeners have probably heard us say things like the average annual return of the stock market is 10 % per year, but that's just a historical average. We don't necessarily know what stocks will be worth in 1 or 10 or 20 years, but it's different with bonds. The returns are predictable. The downside of that is that bonds usually don't make you as much money as more uncertain types of investments like stocks.

25:23Sean Pyles:10 % per year is the average annual return of the stock market, but that would be considered really high for a bond yield.

25:32Elizabeth Ayoola:So Sam, would you say in that case that bonds can be great for diversification then to help manage risk?

25:37Sean Pyles:Exactly. A typical investment portfolio is a mix of bonds, which give you that predictability, but usually kind of low returns, and stocks, which are less predictable, but generally make you more money over time. And as people are trying to figure out how bonds might fit in with stocks as well in their own portfolio, a lot of financial advisors will suggest that folks who are younger and have more time until retirement invest primarily in stocks because of their potential for greater returns compared to bonds on average. But as you get closer to retirement, bonds can be a safer, less risky investment.

26:13Elizabeth Ayoola:Now that we are all caught up on what bonds are, let's get to the first listener question, which comes from Teal, who sent us an email. Here it is, read by our producer, Tess Vigland.

26:24Sean Pyles:Hey, nerds! Hoping you can talk about savings bonds on your podcast. My grandparents bought me a ton of savings bonds when I was a child, and I cashed them when I was in college and they paid for all my textbooks, laptops, and even some living expenses during my six years in school. I have young children and it's unlikely we'll be in a position to pay for higher education for them, but would like to help them how I can with whatever they need getting set up in their young adult lives, a car, college textbooks, furniture for a first apartment, et cetera, et cetera. Here's my questions. Are savings bonds even a good investment?

27:00Sean Pyles:Are there better options? We don't know for sure our children will even pick higher education, and we want them to be able to have flexible spending options. When is a good time to buy savings bonds? When is not a good time to buy? If they are a good option, how do you even purchase them? Thank you, Teal. And thank you, Tess. Okay, so our listener has the financial goal of saving for their kids' future education and maybe some living expenses, whether they go to college or another path. There are a lot of different ways to save for this type of expense, but our listener is specifically interested in bonds, so we'll start there.

27:36Sean Pyles:There are two types of bonds that are specifically crafted to help pay for education expenses, Series EE and Series I bonds, and these are federal bonds. Sam, can you give us a brief explanation of each and why are they beneficial, any drawbacks, all that? So these are both non-marketable government bonds that are designed for long-term savings purposes. Series EE bonds earn a fixed rate of interest, and the Treasury Direct website notes that at current rates, they are guaranteed to double in value in 20 years. Now, Series I bonds are designed to protect your money from inflation. They have a variable interest rate that changes every six months.

28:21Sean Pyles:It's typically 1.10 % plus the current inflation rate at the time of the latest adjustment. In both cases, there's a minimum purchase of$25 and a maximum purchase of$10 ,000 per calendar year. These are both federally taxable, but exempt from state tax. Both types of bonds can be cashed in early after a minimum of 12 months, but you forfeit the last three months of interest if you do that. Some folks really like EE or I bonds because the interest earned on them can actually be excluded from your federal taxes if you use the bonds for qualified educational expenses, and that can be pretty sweet.

29:02Sean Pyles:But you do have to follow some really specific rules around which educational expenses that you can use the bond money for. Otherwise, you won't get that tax benefit.

29:12Elizabeth Ayoola:I'm going to have to consider that for my son's college fund. But there are other bonds that folks can use to save money for expenses that come with fewer guardrails than Series EE and Series I bonds. Can you outline another bond or two that might help our listener or other people like me looking to save for education expenses, Sam?

29:31Sean Pyles:Regular treasury bonds are also state tax exempt and also available in long maturities like 10, 20, or 30 years. And much like Series EE savings bonds, you'll know exactly how much you earn if you're going to hold them to maturity. The main thing that distinguishes treasury bonds from savings bonds is that you can sell them before maturity. There's no interest penalty for that, but if you sell a bond for a lower price than you paid for it. You won't get all your money back. If you sell for a higher price, you'll earn a profit, but the profit will be subject to capital gains tax. Now, those fewer guardrails can be a blessing or a curse.

30:18Sean Pyles:They give you more flexibility if life goes in an unexpected direction and you need money sooner, but otherwise you do have to kind of resist the temptation to sell early. Our listener also has some pretty specific questions about buying bonds, namely whether there's a specific time that is better to buy them or not good to buy them, and also how to buy them. So what should our listener know here? Well, I'll start with the how. You buy savings bonds at treasurydirect.gov. You set up an account there, and that lets you buy them and manage them and cash them out. Savings bonds, bonds, again, are non-marketable, which means they don't trade and they're not sold at a discount.

31:02Sean Pyles:So there's really no way to time the market with savings bonds because there is no market. The best time to buy them is whenever it makes sense for your long-term financial goals. With treasury bonds or other types of bonds, it's different. You can buy treasury bonds via Treasury Direct, but you can also buy them through brokerage accounts that offer individual bonds. Hypothetically, you might luck out and buy a bond at an unusually steep discount, meaning a very high yield. But generally speaking, trying to time the market is easier said than done. At least timing it successfully.

31:45Elizabeth Ayoola:We're going to shimmy along to the second question, which our producer Tess is going to read again.

31:51Sean Pyles:Oh, well, here I am again. All right. Hi, I have a series double E savings bond that I was gifted a long time ago. It reached maturity four years ago, but I don't know what to do with it. I've tried Googling, but I ended up more confused. How do savings bonds work and how do I cash in? Thanks for your help, Valerie. All right. Valerie's question is pretty straightforward. So, Sam, I know you touched on this earlier, but how do savings bonds work? As we've mentioned, Series EE bonds earn a fixed rate of interest. They'll double in value in 20 years at current rates. But given that Valerie's bonds have already matured, she doesn't need to worry about forfeiting interest to early withdrawal penalties when she cashes them in.

32:37Elizabeth Ayoola:And then how can Valerie cash them in?

32:39Sean Pyles:So the best place to go for this information is the Treasury Direct page on how to cash out savings bonds. They have thorough instructions. But basically, it depends on whether the bonds are paper or electronic. Nowadays, bonds are only offered electronically through TreasuryDirect.gov, but they used to also be available as paper bonds. And given that she said that these bonds were gifted a long time ago, they might be that. If it's paper, it's a matter of calling a bank she has an account with and asking if they'll cash them. If it's electronic, she'll need to log into treasurydirect.gov and cash them there.

33:24Sean Pyles:And are there any tax considerations that Valerie should be aware of here? Yeah. Income from savings bonds is exempt from state and local taxes, but it is federally taxable. Treasury Direct, or the bank that cashes them in the case of paper bonds, will send her a 1099-INT form to include with her next federal tax return.

33:48Elizabeth Ayoola:Now, after giving us a rundown of bonds and answering these two listener questions, do you have any final thoughts you want to leave with us about bonds, Sam?

33:56Sean Pyles:If you're interested in buying individual treasuries or municipal bonds or corporate bonds, you'll need a brokerage account that offers individual bonds because not all of them do. And NerdWallet's Best Online Brokers for Bonds Roundup is a good place to start. Love a good plug. Well, thanks for coming on, Sam. Of course. Thanks for having me. That's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at podcast at nerdballot.com. And don't forget, you can anonymously submit your budget for us to potentially review on a future episode.

34:39Sean Pyles:Just click the link in the episode description. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

34:49Elizabeth Ayoola:And here is our brief disclaimer. We're not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes, and it just might not apply to your specific circumstances. This episode was produced by Tess Vigland, Hilary Georgie helped with editing, Nick Harissimi mixed our audio, and we want to give a big shout out to NerdWallace editors for all of their help.

35:11Sean Pyles:And with that said, until next time, turn to the nerds.

35:21Elizabeth Ayoola:Every Sunday, we cover the week's tech news on This Week in Tech. Hi, this is Leo Laporte from the Twit Podcast Network, inviting you to join me this week with Father Robert Ballasier, the digital Jesuit, and my car guy, Sam Abul Samad. We'll talk about Flock cameras. They're everywhere, and they're capturing a lot more than just your license plate. We'll also talk about the lawsuit against Meta and Instagram that could cost them every penny they have. That and a whole lot more.

35:46Sean Pyles:This week on TWIT, you'll find it on our website and wherever you get your podcasts. Fall is the perfect time to refresh and reorganize your space. At the Home Depot, find power tools and tool sets starting at$50 to help tackle DIY projects, home updates, and more. Whether you're drilling brackets to support new shelving or sharpening your hedge trimmer blade with an angle grinder, The Home Depot has the tools you need to check projects off your list. Shop Labor Day savings at The Home Depot and gear up for fall projects with the right tools to keep your projects moving.