If you’re looking to diversify your portfolio look no further than U.S. treasury savings bonds. These bonds are highly liquid investments that promise generous returns even in times of high inflation. Like we are experiencing now in the U.S. A big advantage of treasury savings bonds is that returns are guaranteed. That is, they are backed by the full faith and credit of the U.S. government. And though its debt is high, the U.S. has never defaulted on its debt. Here are the three best treasury investments for beginner investors.
What Are Bonds?
A bond is a fixed-income investment security that represents a loan made by the investor (bond holder) to a borrower. If you purchase treasuries, you are the investor, and the U.S. government is the borrower.
Here are the three best treasury investments for beginner investors:
Series EE Savings Bonds
These are considered low risk investments that earn interest over 30 years. The biggest advantage of Series EE bonds is the government guarantees your investment will double in value in 20 years. This incentivizes the investor to hold the bond for at least 20 years if not to maturity. Interest on these bonds compounds semiannually as a new interest rate is applied every 6 months. Rather than paying interest back to the bondholder, interest is added to the initial principal to create a new principal. Future interest payments are based on the new principal and the accumulation of previously earned interests [TreasuryDirect].
Do I have to pay taxes? – Series EE Bonds are exempt from State taxes. Additionally, bondholders can choose to pay their taxes on their earnings in the year that it is earned or defer to when the bond is redeemed.
Am I protected against inflation? – Series EE Bonds do not consider inflation.
Series I Savings Bonds
Similar to series EE bonds, series I bonds are considered low risk highly liquid investments. This particular treasury bond, however, is inflation protected. This is done by adjusting the bond interest rate periodically to keep up with inflation. Currently, interest rates are adjusted in April and November of each year. Like the series EE savings bonds, each time interest rates are adjusted, the previous interests are added to the initial principal. Therefore, bond holders get the benefit of semiannual compounding interest. To determine interest, the government considers the current CPI then adds a fix markup. Bonds mature in 30 years however the bond holder can redeem the bond before this time. Keep in mind that there is a penalty if bond holders redeem the bond before 5 years [TreasuryDirect]. Series I bonds are considered good treasury investments for beginner investors.
How does this affect my taxes? – Series I savings bonds are exempt from State taxes. Additionally, bondholders can choose to pay their taxes on their earnings in the year that it is earned or defer to when the bond is redeemed.
Am I protected against inflation? – Series I savings bonds are inflation protected.
Treasury Inflation Protected Securities
TIPS are unique treasury securities in that not only is the interest rate adjusted for inflation but also the principal balance returned to the bondholder. TIPS are adjusted every 6 months for inflation. Therefore, TIPS bondholders do not have to worry about the value of their returns being eroded by inflation. The minimum a principal returned to the bond holder is the original amount loaned. However, the returned principal is adjusted for inflation allowing the bondholder to receive additional payment on top of their original principal.
How does this affect my taxes? – TIPS are exempt from State taxes.
Am I protected against inflation? – TIPS are inflation protected.
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