So Many Shoes, So Little Money – Blog

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July 21st, 2009

In addition to treasury bills, treasury notes and treasury bonds, the US government also issues savings bonds. There are two kinds of savings bonds: “I” savings bonds and “EE/E” savings bonds.

I savings bonds can be purchased for as little as 25 dollars up to a maximum of 5,000 dollars. They pay an annual interest rate which is adjusted twice a year based on the consumer price index. The consumer price index is a measure the government uses to calculate inflation. As the index changes, your interest rate rises or falls during the time period of your bond. This is how the amount of money your money earns for you keeps up with the rate of inflation: when inflation is high, you earn more interest; when inflation is low, you earn less interest.

Note:  Inflation is the reason keeping your money in a shoe box or under the bed is a bad idea. A dollar today will buy more than that same dollar tomorrow. If you put your money in a shoe box, and decide to spend it ten years later, the amount of money you put in will be worth less (you will be able to buy less with it) than you would have at the time you tucked it up in your closet.

Note #2: Fashionista Fact:

Manolo Blahnik’s first shoe collection appeared in 1972, when after presenting the legendary Vogue editor Diana Vreeland with some theater design sketches, she advised him to “go with the shoes”. Today, a pair of his fabulous shoes (known to Fashionista’s everywhere simply as Manolo’s) start at 500 dollars. In 1972, they would have cost 102 dollars—102 dollars in 1972 is the same as 500 dollars today. That’s inflation at work.

The interest paid is added to the value of the bond each month and is paid to you when you cash the bond I savings bonds must be held for one year but can be held as long as thirty years. There are some penalties if you hold them less than five years, but the maximum penalty is the forfeiture of three months interest.

EE/E savings bonds have many of the same characteristics as I savings bonds: they, too, can also be purchased for as little as 25 dollars up to a maximum of 5,000 dollars. They also must be held for one year but can be held for as long as thirty years. They have the same penalties as I bonds, forfeiting three months interest, if you hold them less than five years. However, unlike I savings bonds, EE/E savings bonds pay a fixed interest rate. Instead of calculating the interest rate based on the consumer price index as Series I bonds do, the interest rate is a combination of a fixed rate, which applies for the life of the bond, and a semiannual inflation rate which is calculated on an average six-month rate of interest on US government treasuries.

So the biggest difference between the two kinds of savings bonds is how the interest is calculated. And how the interest is calculated determines the interest rate you receive and, of course, reflects how hard your money is working for you.

You can buy savings bonds or treasuries, learn what interest each type of savings bond is paying, and otherwise get additional information at www.treasurydirect.gov. This website is managed by the Department of the Treasury. Reviewing this site is a good way to determine which of the two Series are best for you.

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