A Classic Way to Earn More on Your Savings Is Back

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US Savings BankInterest rates have never been lower, and it looks like they're going to stay that way for quite a while. Although that's good news for homebuyers, homeowners able to refinance their mortgages, and other borrowers, savers have seen much of their interest income evaporate due to rock-bottom rates on savings accounts, bank CDs, and other income-producing investments.

Yet one savings option many people don't think about has become attractive again -- savings bonds.

Although you may think of savings bonds as a historical relic from World War II days, there's one type of savings bond pays top-notch rates right now.

The Ups and Downs of I-bonds

Savings bonds come in two basic flavors. Traditional Series EE bonds pay a fixed rate of interest as long as you own them. Unfortunately, they too have succumbed to the low-rate trend, paying just 0.6% right now.

But Series I savings bonds -- also known as I-bonds -- work differently. Their rates are tied to changes in inflation as measured by the Consumer Price Index. In the past, I-bonds used to tack on an additional premium above inflation, but currently, that premium is zero, meaning that your investment will track exactly with the CPI.

That may not sound like much. But at this point, matching inflation gets you a much better deal than you'll find at your local bank. Buy an I-bond now and you'll get 2.2% interest for the next six months. Six months ago, they were returning more than 3%, and this time last year, you could get more than 4.5% on your money.

After the first six months, you'll get a new rate based on inflation over the previous six months. But even if prices fall, you won't lose money.

Getting Signed Up

The Treasury has ramped up its campaign to have people start buying savings bonds through payroll direct deposit. This video explains the new program, which lets you open a TreasuryDirect account and sign up to invest through your HR department at work. You don't even need a separate bank account.

If you're tired of earning next to nothing on your money, savings bonds are worth a second look. For more information, check out the Treasury's new savings bond initiative website.



You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.

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Michelle L

Wow -- nice way to save....thanks for the link!!

September 24 2012 at 3:03 PM Report abuse rate up rate down Reply
itsjustme8888

I used to give my 4 grand daughters bonds twice a year. I stopped when they switched over to an all electronic system. It is to complicated to give the gift bonds. The website is to confusing. I tried one time and it gave me the bond. I couldn't find out how to give it as a gift. So we just stopped buying them.

September 22 2012 at 11:08 PM Report abuse rate up rate down Reply
mgmccune

The EE bonds only pay 0.6%, but if you hold them until maturity (20 years) they are guaranteed to double in value which implies a 3.5% annual return. Not bad when one considers that this is much better when compared to the current rate being priced into 30 year Treasury bonds. And the EE and I-bond's interest is tax-deferred too!

Compare the price of Gold currently and how much it has appreciated over the last 30 years, and then compare the value of a 30 year old (when they stop earning interest) EE bond of originally equal value. The EE bond is worth about 3x more in dollars!

September 22 2012 at 8:08 AM Report abuse +1 rate up rate down Reply
paddleman1928

the official inflation rate is held down by the gov't so this will not be an effective strategy

September 21 2012 at 10:57 PM Report abuse rate up rate down Reply
jhbonz

buy gold/silver

September 21 2012 at 10:47 PM Report abuse rate up rate down Reply
kafienkarl

Just do what RomneyCare has done with tax schemes in Bermuda, Caymna Islands and Swiss Banks. Romney demanded 10 yrs. of tax returns from Ryan but Romney will only show us two years income tax returns. At the same time he demonizes the 47% that don't pay federal income taxes although many pay payroll taxes. Just remember both during the Reagen and Bush income taxes were cut for the poor. There was also tax credits for those that qualified NOW these people are being said to be calling themselves victims and entitiled. What's interesting is when you LOOK at the top ten states with the highest % of non tax filers. Its also interesting to consider that the 47% includes a large Republican voting demographic. Romney and Ryan are both part of the problem.

September 21 2012 at 9:18 PM Report abuse rate up rate down Reply
clyogi

Just saw a carton which said: "if Obama thought he inherited a mess when he was elected, wait until he sees the mess he inherits if he serves a second term." The longer he is President, the longer interest rates will stay down because the economy will not be in recovery mode. This is reality as contrasted with the hypotheticals BO and Joe tell us if their opponents are elected.
If you want relatively safe income with half-way decent yields (at a current federal tax rate of 15%, invest in the ten highest yielding companies in the Dow 30 (current average is 3.8%). After two years, you will have both capital growth and steady income. Of course, the tax advantages will go away if BO serves that second term.

September 21 2012 at 8:08 PM Report abuse rate up rate down Reply
gtrost6736

There is a much better way of earning money than banks or bonds...invest in utility stocks some of which are now paying 5% or so and are about the safest thing to earn money...utiliies ( especially electric ) generally dont go out of business as no one like to sit in the dark ( except maybe honeymooners ) and the dividends keep rolling in.....plus with the coming of future electric cars who need electricity to be charged up it could be a bonanza for electric utilities.....

September 21 2012 at 5:04 PM Report abuse rate up rate down Reply
1 reply to gtrost6736's comment
charpist5

Repeat yourself much?

September 21 2012 at 5:11 PM Report abuse rate up rate down Reply
gtrost6736

There is a much better way of earning money than banks or bonds...invest in utility stocks some of which are now paying 5% or so and are about the safest thing to earn money...utiliies ( especially electric ) generally dont go out of business as no one like to sit in the dark ( except maybe honeymooners ) and the dividends keep rolling in.....plus with the coming of future electric cars who need electricity to be charged up it could be a bonanza for electric utilities.....

September 21 2012 at 5:03 PM Report abuse rate up rate down Reply
gtrost6736

There is a much better way of earning money than banks or bonds...invest in utility stocks some of which are now paying 5% or so and are about the safest thing to earn money...utiliies ( especially electric ) generally dont go out of business as no one like to sit in the dark ( except maybe honeymooners ) and the dividends keep rolling in.....plus with the coming of future electric cars who need electricity to be charged up it could be a bonanza for electric utilities.....

September 21 2012 at 5:02 PM Report abuse rate up rate down Reply