VOL. 133 | NO. 139 | Friday, July 13, 2018
Rays of Wisdom
Dana and Ray Brandon
Treasury Bonds, Savings Bonds are Gifts That Keep on Giving
Ray and Dana Brandon
Ray’s Take: U.S. savings bonds were once considered the ugly duckling of personal investments. It seemed the only time people bought them was when they were feeling super patriotic or when you couldn’t think of a better gift to give someone. Growing up, I remember them being a popular gift for newborns – the thought being that as the baby grows so does the money.
Things are different now. As we approach the 10-year anniversary of the current bull market in stocks, it may be time to give a serious look at bonds. Savings bonds can be a good deal for investors and are an excellent form of fixed-income savings, especially for intermediate financial goals like college education. U.S. savings bonds are considered one of the safest investments, because they are backed by the full faith and credit of the U.S. government. Approximately, 55 million people currently own savings bonds.
There are two types of bonds – treasury bonds and savings bonds. Treasury bonds pay a fixed rate of interest over their lifetime. This can be anywhere from four weeks to 30 years. Some treasury bonds pay interest semiannually and others pay at maturity. You can buy and sell them on secondary markets. If held to maturity, you minimize interest rate risk.
Savings bonds, on the other hand, can only be purchased and redeemed by selling them back to the U.S. Treasury. Savings bonds started in 1935 by Franklin Roosevelt, the main purpose being to finance World War II.
Savings bonds are purchased at a discount to face value and accrue interest until they mature or are redeemed. Interest on the bonds is free from state and local taxes.
For many investors, the recession and bear market of 2008-2009 seem like a distant memory. I remember them painfully well and never underestimate the importance of a fixed-income portion of most investment portfolios.
Dana’s Take: When a special friend has a child, Ray has set up a savings account or 529 in the child’s name. Each year, the family encourages contributions to the fund along with a smaller gift or in place of it. As the child grows, so does the fund. Stocks are popular in these accounts now, but as kids approach college, bonds play a more and more important role.
It’s fun to ask the child over the years, how he would spend the money if one day he came across a bank account in his name. I asked our nephew when he was 10 and he said he would buy $5,000 worth of wrestling figures. Now, he has a Ph.D. and is not quite the wrestling fan he once was.
Ask your financial adviser about setting up a savings account for a child, teen or young adult. It’s a gift that keeps on giving.
Ray Brandon, CEO of Brandon Financial Planning, and his wife, Dana, a licensed clinical social worker, can be reached at brandonplanning.com.