Thursday, March 29, 2012

Money - Savings bond update

After writing about Series EE and I Savings bonds the other day, I decided to pull out my savings bonds and calculate how much they are worth.  Back when I purchased the EE and I bonds in 2004-2006 they were still being issued in paper form.  I didn't have very much money at the time.  It had been a year since I got out of the Army and was living off my GI Bill and part-time work while finishing my degree.  As of 2012 paper bonds are no longer available at financial institutions.  They can only be purchased through Treasury Direct.

It is unfortunate, but I do understand why they decided to change for cost and tracking is better for America.  I did like the different pictures on each of the different notes.

The Series I bonds have outperformed the Series EE by quite a lot.  My EE bonds as of today are earning 1.19%.  My I bonds are earning currently anywhere from 4.08 -- 4.48%.  I spent $1,025 and have earned tax free interest of $293.01.  The interest will remain tax free until I cash out.  Since I purchased them more than 5 years ago, I can withdraw the money at anytime without any penalty, and they will be except from state income tax.

You can purchase up to $10,000 each of the EE and I savings bonds.  The I bonds have seriously outperformed the EE bonds, and I expect them to continue to outperform them.  Like the treasury direct website indicates that you may be better off purchasing different treasuries if you are paying larger amounts in cash.  These bonds were setup so that individuals can start small and grow a bond portfolio.  You can read more about this in their FAQ.

After reviewing the performance of these bonds I must say I am a fan of the series I bonds, and will continue to purchase more through Treasury Direct.  This form of investment is very patriot.  It is even written on the EE savings bond in the picture.  If you need a simple way to save money you can buy them with as little as $25.

Bonds are a key ingredient to anyone's investment portfolio.   These bonds makes it very easy to start small and without the brokerage fees or bank fees.  It is the gift that keeps on giving.

One word of caution...being a tax guy, one must be careful when cashing in these bonds.  Because they accrue interest tax free the amount of money that one can earn over several years could be substantial.  If you are eligible for the Earned Income Tax Credit (EITC) you might lose out on serious money if you cash out of your bonds and have investment income of $3,200 for 2012.  The maximum credit for someone married with 3 or more children in 2010 was $5,666.

In American it is unfortunate that in some situations tax decisions trumps economic decisions.  Meaning we make decisions based on tax consequences rather than determining what is the best economic decision.

All in all, bonds are a simple no frills investment tool that is overshadowed and drowned out by all the noise.  Why?  Well, brokers will not make money off you if you buy these instruments.  Being a ex-stockbroker someone could ask me what they should do with their money.  What should they invest in?  I couldn't tell them that the best decision for them would be to pay off their credit cards or mortgage.  Even if it were true for this person.  Remember, very few people are financial advisers.  Which means most people can only give guidance.  Why?  Liability can fall on those who give advice.  A well written article by Mary Willett wrote on this subject.

As a stockbroker, you can only guide them with the tools you have available.  Digging into your financial situation beyond an investment portfolio is out of the scope and training of a stockbroker.  As a stockbroker my job was to give guidance, relay information, and help the sales team bring in additional money.  Use people for what they are capable of delivering.  You wouldn't ask a realtor what stocks to pick, nor would you ask your stockbroker if renting out your house is a smart thing to do.

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