You may have ever heard about how savings bonds are claimed to be the safest investment but you may not really know how do savings bonds work? Well, for the majority of the people, such term may sound like quite unfamiliar. But for those who are quite familiar with the field of finance, savings bonds surely are not a new term anymore. To make it simpler for you to understand how savings bonds work, it’s better for you to know what they are actually first. Savings bonds actually refer to a kind of investment instrument. And yes it is believed to be the safest way of investment because it’s backed up maximally by the government. Thus, there is no way for you to lose your money as long as you follow the rules.
So, how do savings bonds work exactly? You can imagine savings bonds as a kind of thing in which you can purchase and then the money you use to buy it will be used by the government to deal with the other kinds of investment. In other words, your money is going to be circulated to the more promising kinds of investment with surely bigger risks. The way how the money is going to be circulated is outside your concern. The government is the one to take care of it. However, there is a catch for this kind of investment. Savings bonds, despite being the safest way of investment, must not be expected as a fast way of investment. In other words, you can never expect your money to return to you in significantly bigger amount within short amount of time. In other words, it’s a long term investment. Sure, you can get your money back in shorter duration but the amount you get isn’t that big.
There are 4 things you need to understand in relation with how this kind of investment works. The first is about how you can only cash in a Series EE bond (it’s the most popular kind of savings bonds nowadays) after a year from your purchasing moment. Then, the next one, you will incur a kind of penalty which is equivalent to 3 months of interest in case you are to redeem a Series EE bond when it has not reached 5 years old. The third is about how the interest rate of the savings bonds will be reset by the Treasury if the bond matures 20 years after the bond is issued. And then, the Treasure will also extend the maturity of the bond as many as 10 years more. And the last thing you need to know is that the savings bonds are actually the part of federal income tax. It means that you can consider it as state or even local taxes. How do savings bonds work? Well, you have understood it, right?