Savings Bonds Explained: When to Buy, When to Cash In, and If They’re Still Worth It

Summary

NerdWallet's Smart Money Podcast: "Savings Bonds Explained: When to Buy, When to Cash In, and If They’re Still Worth It"

Release Date: July 21, 2025

In this insightful episode of NerdWallet’s Smart Money Podcast, hosts Sean Pyles and Alyssa Elizabeth Ayola delve into the world of savings bonds, exploring their viability as an investment option in today’s financial landscape. Alongside engaging discussions about personal finance and budgeting for trips with friends, the episode features expert insights from Sam Taub and surprise guests from the Smart Travel podcast, Sally French and Megan Coyle.

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1. Traveling with Friends: Personal Experiences and Financial Strategies

Before diving into the main topic of savings bonds, Sean and Alyssa share their personal experiences and financial strategies related to traveling with friends.

A. Budgeting for Trips

Alyssa highlights her approach to budgeting during trips, emphasizing a balance between individual and shared expenses. She states, “I usually just pay for things separately versus pulling money together and paying for the trip” (02:33), allowing for flexibility and personal financial management.

Sean complements this by explaining his method of combining individual expenses with shared costs, such as pooling money for an Airbnb and taking turns covering meals. “We don’t worry too much about counting the pennies. That’s generally how we budgeted, and it’s worked out so far” (03:10).

B. Managing Different Money Values and Personalities

Alyssa shares lessons learned from traveling, particularly the importance of understanding and respecting different financial values among friends. Reflecting on her trip to Mallorca, she notes, “Each person has different money values. Some value experiences over shopping, and others might want to spend their time differently” (04:07). This difference can lead to conflicts, as she experienced during a trip to Miami where differing expectations caused tension (05:07).

C. The Power of Communication and Budgeting

Alyssa emphasizes the necessity of communicating financial boundaries and sticking to personal budgets to avoid overspending. She recounts her own experience of overspending during a vacation without a budget, leading to financial strain upon return (05:50). Now, she carefully plans her budget and communicates her limits to travel companions, enhancing trip harmony (06:23).

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2. Expert Insights: Sally French and Megan Coyle on Smart Travel

Midway through the episode, hosts welcome Sally French and Megan Coyle from the Smart Travel podcast to share their expertise on traveling with friends.

A. Identifying Compatible Travel Companions

Sally discusses the importance of recognizing that not all close friends make good travel buddies. “There are some people who are your best friends in your hometown, but they might not be good travel companions,” she explains (10:41). This insight encourages listeners to evaluate their travel partnerships thoughtfully.

B. Planning and Itinerary Sharing

Megan offers practical advice on group travel planning, suggesting that sharing the itinerary early allows friends to make alternative plans if certain activities don’t align with their interests or budgets. She cites her recent trip to Cinque Terre, where early sharing enabled friends to plan personal activities that suited their preferences (12:05).

C. Flexibility and Personal Space

Both Sally and Megan emphasize the significance of flexibility and allowing personal space during group travels. Sean adds that bringing a good book can provide a way to enjoy downtime without feeling pressured to spend excess money on unwanted activities (13:05).

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3. Deep Dive: Understanding Savings Bonds with Sam Taub

Transitioning to the episode's primary focus, Sean and Alyssa bring in Sam Taub, a seasoned investing expert, to unpack the complexities of savings bonds.

A. Bonds 101: Basics and Types

Sam begins by defining a bond as an "IOU" where investors loan money to governments or corporations in exchange for interest over time. He categorizes the main types of bonds:

• Treasury Bonds: Loans to the U.S. government, highly trustworthy, and tradable on the market. Interest is federally taxable but exempt from state and local taxes.
• Savings Bonds: Non-marketable loans to the U.S. government, generally comparable to CDs with early redemption penalties. They offer fixed or inflation-protected interest rates.
• Municipal Bonds (Munis): Loans to state or local governments, slightly riskier than Treasury bonds with higher yields. Interest is often exempt from federal and sometimes state taxes.
• Corporate Bonds: Loans to companies, riskier than government bonds with higher yields, but fully taxable.

B. Yield Explained

Sam elaborates on bond yields, explaining that "yield to maturity" represents the annual return if the bond is held until it matures. He notes, “When yields go up, it usually means investors have lost confidence in the borrower’s ability to repay” (20:44), which can have macroeconomic implications, such as higher interest costs for the government.

C. Strategic Use of Bonds in Portfolios

Bonds are highlighted as essential for diversification, offering predictable returns to balance the volatility of stocks. Sam advises that younger investors may favor stocks for their higher growth potential, gradually shifting towards bonds as retirement nears to reduce risk (23:37).

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4. Listener Questions: Evaluating Savings Bonds for Future Expenses

The episode features two listener-submitted questions about savings bonds, addressed comprehensively by Sam.

A. Are Savings Bonds a Good Investment?

Listener Teal asks whether savings bonds are worthwhile compared to other investment options for funding future education and living expenses. Sam discusses:

• Series EE Bonds: Offer a fixed interest rate with a guarantee to double the investment in 20 years. They are federally taxable but exempt from state taxes.
• Series I Bonds: Provide inflation protection with a combined fixed and variable interest rate, adjusting every six months based on inflation.

Both bonds allow for flexibility in usage, especially when proceeds are used for qualified educational expenses, which can exclude the interest from federal taxes.

B. Best Times to Buy and Purchasing Process

Teal inquires about optimal times to purchase bonds and the buying process. Sam advises that for non-marketable savings bonds, “the best time to buy them is whenever it makes sense for your long-term financial goals” (28:27), as there’s no market timing involved. He explains the purchasing process via TreasuryDirect.gov for electronic bonds and through banks for paper bonds.

C. How to Cash in Matured Savings Bonds

In the second question, Valerie seeks guidance on cashing in mature Series EE bonds. Sam clarifies that matured bonds can be redeemed without penalties and provides instructions:

• Electronic Bonds: Redeem through TreasuryDirect.
• Paper Bonds: Contact the issuing bank for redemption.

He also highlights the tax implications, noting that “income from savings bonds is exempt from state and local taxes but is federally taxable” (31:09).

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5. Final Thoughts: Integrating Bonds into Financial Planning

Concluding the discussion on bonds, Sam emphasizes their role in providing financial certainty and managing investment risk. He recommends NerdWallet’s online brokers for those interested in purchasing individual bonds and highlights the importance of aligning bond investments with personal financial goals and risk tolerance (31:40).

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Conclusion

This episode of NerdWallet's Smart Money Podcast delivers a comprehensive exploration of savings bonds, enriched by personal anecdotes and expert advice. Listeners gain a clear understanding of different bond types, their benefits, and strategic applications within investment portfolios. Additionally, the segment on traveling with friends offers valuable insights into balancing friendship dynamics with financial planning. Whether seeking to optimize investment strategies or manage group travel finances, this episode equips listeners with actionable knowledge to make informed financial decisions.

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Note: All timestamps in brackets [MM:SS] correspond to points in the transcript where notable quotes and information were discussed.

Transcript

[Sean Pyles]

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[Alyssa Elizabeth Ayola]

Have you ever heard the saying that you don't know someone until you go on vacation with them? Sean?

[Sean Pyles]

Uh, no, but it makes sense.

[Alyssa Elizabeth Ayola]

What are you living under a rock? Okay, I'm just kidding. All right, what about the one that traveling with friends can make or break a friendship? Have you heard that one?

[Sean Pyles]

I haven't heard it, but I've experienced it, so I know that to be true. But where are you going with this?

[Alyssa Elizabeth Ayola]

I'm going, Sean, to the topic of today, which is planning a trip with friends.

[Sean Pyles]

Welcome to NerdWallet's Smart Money podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[Alyssa Elizabeth Ayola]

And I'm Alyssa Elizabeth Ayola. On this episode, we're going to answer a listener's question about whether savings bonds are a good investment.

[Sean Pyles]

But first, we are talking about traveling with friends.

[Alyssa Elizabeth Ayola]

We have surprise guests for you midway, so keep listening. Sean, have you ever traveled with friends?

[Sean Pyles]

I've traveled extensively with my friends. I have a core group of my pals from college, and we've traveled around the country and internationally together. And I feel really grateful to have this core group of friends who we've actually gotten deeper and reaffirmed our friendship through all the trips that we've been able to take together. So it's been lovely, lovely. What about you?

[Alyssa Elizabeth Ayola]

Oh, I love that. I personally have gone on two trips with friends and I think they were a mixed bag. So definitely made some core memories, but definitely had a lot of learnings there. But since we are the smart Money podcast and we like to Talk about money. I want to know about how you budget for a trip with friend Sean. Now, on the two trips that I've been on, we usually just pay for things separately versus pulling money together and paying for the trip. So how do y' alls usually do it?

[Sean Pyles]

I usually do a combination where I'm paying for my own airfare, I'm paying for my own hotel room, but if we get something like an Airbnb, we'll pool our money for that. And oftentimes we will take turns covering different meals. My friends and I like to be really generous with each other, so it might be okay. I'm going to get this lunch, and you'll get dinner, and we'll all figure it out, and it'll kind of come out in the wash. We don't expect that of each other necessarily, but that's just how it goes. And if there's one time where a friend maybe has a tighter budget, we'll pick up the slack for them. And we don't worry too much about counting the pennies. That's generally how we budgeted, and it's worked out so far.

[Alyssa Elizabeth Ayola]

I think that's such a testament to, first of all, how close you guys are and also how much trust you have with one another. I remember on social media the other day, this lady was giving advice about how to save money, and then she goes, you know, you don't need to always pick up the tab with your friends. Just pay for what you ordered. And I know that's like, a controversial topic, but, yeah, I love that you guys just help each other out and you have that kindness going. I know that friendship trips for me, like I said, can be fun, sometimes a little stressful, but I think it depends on the different personalities you have coming on the trip and also how they mesh. But one thing I will say, Sean, is I've learned so many things about myself, about my friends, and about money through vacationing.

[Sean Pyles]

Yeah, I bet. So what have been the main things that you've learned from these two trips that you did?

[Alyssa Elizabeth Ayola]

Two major themes are, one, the importance of knowing and sticking to your money values. And then the second one for me is the power of a budget.

[Sean Pyles]

Okay. I feel like there has to be at least one good story there. So tell me about the values part. What have you learned and how did you learn it?

[Alyssa Elizabeth Ayola]

Oh, my goodness. Well, in terms of the values point, I would say the trip that I have in mind is one that I took to Mallorca with some friends, and I have learned that each Person has different money values. So some people, for example, may want to value experiences over shopping, right? They might want to visit the malls and spend their whole day buying things. While someone else who maybe values more experiences may want to zipline, for example. Example. And what I've learned is those two things can be conflicting. Right.

[Sean Pyles]

A clash of different values.

[Alyssa Elizabeth Ayola]

The clash of different values. I know once I also went on a vacation with my friend to Miami while I was living in London. And when I go on vacation, I value rest and I will pay for restful activities. But she values gallivanting. Nothing wrong with either of those things. Right. But I will say we left that trip not talking because she got all upset with me because I didn't want to go out all the time. And I got upset with her because she wanted me to be going out all the time.

[Sean Pyles]

So.

[Alyssa Elizabeth Ayola]

So definitely some headbutting.

[Sean Pyles]

And that speaks to the challenge of expectations on a trip like this. You were each expecting that the person you were with would want the same thing as you on the same schedule. And that's not realistic all the time.

[Alyssa Elizabeth Ayola]

It's not. And also that brings me to my second learning, which is budgeting. I think it's so important to have a budget for yourself and not to succumb to the peer pressure when traveling with friends of basically having to spend money on every single thing. I will say that I started out, I have to be honest here, not having a budget when I went on vacation and just spending money on anything. But I have learned that when you do that, you come back and you have post vacation clarity. When you look at all the money that you spent and realize that it was all you.

[Sean Pyles]

Talk with me about that post vacation clarity a little bit. Does that mean that you just went way overboard with your spending and maybe had to rein it back in severely when you got back or any regrets that you have from that or maybe lessons learned?

[Alyssa Elizabeth Ayola]

Absolutely regrets, because like I said, I had no budget. So it's like, oh, do you want to go on this excursion? Yes. Are we going to dinner every night? Absolutely. Right. So I was cosplaying a rich gal while I was on vacation, and when I came back, I found that I was way behind in terms of overspending in my budget and just having to pull back on spending altogether so that I could keep up with my bills and everything else.

[Sean Pyles]

Yeah. How do you budget for vacations now? What's your approach?

[Alyssa Elizabeth Ayola]

Well, first of all, I look at how much money I have in my account for this said vacation.

[Sean Pyles]

It's a good place to start.

[Sally French]

It is.

[Alyssa Elizabeth Ayola]

I ask questions. So how much are all the excursions going to cost? Right. And then I'm honest with myself about how much I can afford to spend. And I think a huge piece there is also communicating that to the people that you're going on the trip with. I feel like some people maybe have shame around doing that because, you know, sometimes you don't want to be the one to say, I can't afford to do X, Y and Z. But it's so important to remember that, hey, if these are your friends, then they should be able to respect your boundaries around what you can spend. And then there have been times, especially this year, I got two trip invites, one to Haiti. Can't remember where the second one was, but I realized, hey, this doesn't align with my budget and goals right now. So I had to say no to the trip altogether. And I'm not going to lie, as a recovering people pleaser, that was really difficult for me. But I'm proud of myself.

[Sean Pyles]

But that's a moment of growth, so I'm proud of you.

[Alyssa Elizabeth Ayola]

Yes. Thank you.

[Sean Pyles]

There's a lot of power in saying no. And you saved so much money by saying no.

[Alyssa Elizabeth Ayola]

I absolutely did. So now I'm going to popcorn to you, Shawn, and I want you to tell me about any of your vacation learnings when traveling with friends.

[Sean Pyles]

Kind of similar to what you mentioned around having different values. I've learned that flexibility and independence are really important when traveling with a group, and so is knowing your strengths. I can use my recent trip to England with my friends as an example here. So we went on this trip with my college friends to England to tour various gardens and also to go see one of my favorite bands, the Scissor Sisters, in concert. And I went on this trip with one of my good college friends who is really organized and is a kind of encyclopedia of various gardens around the world, especially in England. So she did this great job of cataloging various gardens and that was a huge help in just the logistics of our trip. And I love to drive. I am kind of the default driver of the friend group. So I was able to weigh in on what might be a reasonable driving itinerary. I booked the rental car and then I did the actual driving and between my friends ideas of various gardens to go to and what I thought would be a reasonable route for us to take, we had some compromises on, like which gardens we could actually hit, which ones we weren't going to be able to see and would maybe get to next time. And just because we know each other so well and we mesh so well, as we were able to have that sort of open conversation and figure out the details in, like, a really harmonious way. And that just speaks again to our relationship and how good that is. And then around flexibility and independence. Before this became a huge garden tour vacation, it was all about that Scissor Sisters concert. I bought tickets to the show, just assuming we were all gonna go. And when we were planning this vacation, my friend was like, actually, you know, I'm not really big on huge concerts. They can be a little overwhelming. And I totally get that. You don't have to do everything together all the time. Maybe you don't want to go to this museum or you just want to sleep in one day. That's totally okay. I think it's really important to communicate those boundaries, whether it's a personal boundary or a financial boundary, so you don't feel pressured into doing something you really don't want to do, which can cause you to resent your friends.

[Alyssa Elizabeth Ayola]

So, Sean, what you just said reminds me of a story of when I was in Majorca on that trip with my friends, and everybody wanted to go to the club. And honestly, I didn't really want to go. I was drained from spending all day with my amazing friends, and I wanted some quiet time, but I went anyway because of peer pressure. And in the middle of the clubin, I just left. I just. I literally sped, walked home and went to bed.

[Sean Pyles]

And everyone ghost your friends.

[Alyssa Elizabeth Ayola]

I ghosted my friends. And everyone's like, where is Elizabeth? Where is Elizabeth? Elizabeth went to bed.

[Sean Pyles]

I'm all for an Irish goodbye, but when you're out at the club, you got to communicate to your friends to make sure that they know you're safe. So not.

[Alyssa Elizabeth Ayola]

And in a foreign country.

[Sean Pyles]

Yes, and in a foreign country.

[Alyssa Elizabeth Ayola]

But obviously, I have learned to communicate better and, you know, just say no to activities I don't want to do. And it has made friendship trips a lot more harmonious.

[Sean Pyles]

That is a solid piece of advice. Okay, so we are going to bring in our surprise guests, the host of NerdWallet's Smart Travel podcast, Sally French and Megan Coyle. Welcome to Smart Money. Hello.

[Megan Coyle]

Thanks for having us.

[Sean Pyles]

I hope you've been enjoying eavesdropping on this conversation so far.

[Sally French]

This has been the greatest.

[Sean Pyles]

It's been fascinating, this meeting of the podcast minds. We're all here together for the first time. Well, since you guys are such big travel nerds, I'd like to hear how you guys approach traveling with your friends in terms of just being people traveling, traveling together, and also financially.

[Sally French]

Yeah. Well, Elizabeth, I have to say, your story about your friendship kind of not ending out so hot at the end of your trip, it speaks to me, and it really made me realize that there are some people who are your best friends in your hometown, where you live together and function on a daily basis. And they are not good travel companions. But it goes the other way. There are some people who I'm like, you're not like my best friend, but you're an amazing travel companion. It's really interesting to see those differences.

[Alyssa Elizabeth Ayola]

Oh, I love that, Sally. I've never thought about it that way. And honestly, as an adult now, I want to do another friendship travel, but I'm also a little bit traumatized because I think it's so intimate to stay with someone for that many days. Right. And what if you guys drive each other insane? But then like you said, Sally, what if you love each other as travel buddies?

[Sally French]

Yeah. You know, it's like dating. It's like some people are incompatible as a partner in dating, but they're like a fine friend. And then some people are incompatible travel companions. One of my friends and I were saying, someone should make an app where you just like Tinder swipe, but to find someone to travel with. So free idea for any smart money listeners out there. That's a. That's a free startup idea.

[Sean Pyles]

I don't know if I would trust a stranger on an app to travel with. What if they murder me?

[Alyssa Elizabeth Ayola]

I know. Oh, my God. Dum, dum, dum.

[Sean Pyles]

Okay, Megan, what about you? How do you travel with friends?

[Megan Coyle]

Oh, man, I've done it all. I've done, like, the one trip with your one best friend, and we are still friends to this day. So that worked out. I've also done those giant group trips with all of my college friends. And something resonated with me that you said, Sean, sometimes you plan a trip around a big event, and then it turns out, like, not everyone is interested in said event or something like that. So one thing I've found that works really well is just giving everyone the itinerary pretty early. It's like the person who cares the most about the event sends out like, okay, on this day, we're gonna do this. For me, recently, I went to Cinque Terre with seven of my friends. So it was a big group, and we really wanted to do a boat day where you go see all these town pounds on a boat tour. And some people said, in the group chat, they were like, you know, I can't afford that. That's really not in my budget right now. And the good thing was we planned this early enough that they were able to plan other things to do that day that were just as exciting. Like, one of them hiked from every single town from the one most south to the one on the most northern end and had an amazing day. So that would be my tip for groups that are going together is get that itinerary out early so people can make other plans.

[Sean Pyles]

And also, I'll add that one of the best companions that you can bring on a group trip is a good book, because if you don't want to go out for your friends that day, you can just hang out and chill, read a book, and not spend a bunch of money on whatever you don't want to be doing.

[Megan Coyle]

Absolutely.

[Sean Pyles]

Well, Sally, Megan, thank you so much for coming on Smart Money and sharing your travel tips with us. And if folks want to hear more travel tips, they should listen to our Smart Travel podcast, which is fabulous. It is wherever podcasts are found.

[Sally French]

Our pleasure. Thanks for having us.

[Megan Coyle]

See you, guys.

[Alyssa Elizabeth Ayola]

Bye, guys. Up next, we talk about whether savings bonds are good investments.

[Sean Pyles]

But before we get into that, it's that time of the episode where we ask you to send us your money questions. Because that is what the show runs on, after all.

[Alyssa Elizabeth Ayola]

Maybe you are thinking about traveling with friends and want to know how you can budget for that. Or maybe you're thinking about how you can save money on upcoming holiday travels. Whatever your money question is, we nerds are here to help you. Leave us a voicemail or text us on the Nerd hotline at 901-7306-390-1730. N Erd.

[Sean Pyles]

You can also email us your [e-mail] and a reminder that we want to help you with your budget. If you want us nerds to poke around in your budget and give you some tips and strategies, head over to the episode description and click on the link to fill out the Google form.

[Alyssa Elizabeth Ayola]

All right, let's get to this episode's money question segment. That's up next. Stay with us.

[Sean Pyles]

Today's episode is sponsored by Rula.

[Alyssa Elizabeth Ayola]

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[Sean Pyles]

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[Alyssa Elizabeth Ayola]

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[Sean Pyles]

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[Alyssa Elizabeth Ayola]

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[Sean Pyles]

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[Alyssa Elizabeth Ayola]

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[Megan Coyle]

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[Sean Pyles]

Your money questions to help you make smarter financial decisions. This episode we have a couple of questions about bonds from our listeners. We've been hearing more from our listeners about bonds lately, so we wanted to use this as a chance to do a Little Bonds 101 as well as answer our listeners questions. So to help us on this nerdy journey, we're joined by investing nerd and friend of the population, Sam Taub. Sam, welcome back to Smart Money.

[Sam Taub]

Thanks for having me on again, Sam.

[Alyssa Elizabeth Ayola]

Let's start from the top. From the beginning, can you give us a quick explanation of what a bond is?

[Sam Taub]

To start from the top, a bond is basically an iou. When you buy a bond, you're loaning someone, often a government or a corporation, your money and the borrower pays you back, often with interest over a set period of time. Bonds are an example of fixed income investments because the terms of the loan are fixed. If you hold a bond's maturity, that is, until the borrower is done paying you back, you know exactly how much you'll make off of it in both dollar and percentage terms.

[Sean Pyles]

And there are a variety of types of bonds. Can you run us through a few of the most popular ones?

[Sam Taub]

Treasury bonds are loans to the US Government, which is one of the most trustworthy borrowers in the world, just due to the sheer size of our economy. Treasury bonds trade on a market just like stocks, meaning you can buy or sell them at any time. You don't necessarily have to wait until maturity. Savings bonds are also loans to the US Government, but they are non marketable, meaning you can't sell them before maturity. Many savings bonds have a provision that allows you to cash out early, but this usually means forfeiting some amount of interest. It's kind of like a CD in that regard. Income from both treasury bonds and savings bonds is exempt from state and local taxes, but it is federally taxable.

[Sean Pyles]

So those two are bonds that are issued by the federal government. But municipalities can also issue bonds as well. And those are muni bonds, right?

[Sam Taub]

That is correct. Muni bonds are, as you said, loans to state or local governments. Like treasury bonds, they trade on a market, so you can buy or sell them before maturity. Now, muni bonds are a little riskier than treasury or savings bonds because unlike the US government, municipalities do sometimes go bankrupt and default on their bonds. But that extra risk can also mean higher yields. Plus, muni bond income is exempt from federal taxes. If you live in the same state that a muni bond was issued from, it's usually exempt from state and local taxes as well as.

[Alyssa Elizabeth Ayola]

And then can companies offer bonds too? Tell me how those work.

[Sam Taub]

Yep, those are called corporate bonds. Those also trade on a market. And like muni bonds, they're a little riskier because companies do sometimes go out of business and stop paying. But as with munis, that risk can mean higher yields. And corporate bond income, generally speaking, is fully taxable.

[Sean Pyles]

And when it comes to federal bonds, we often hear things like the Yield on the 10 year treasury is X percent. Can you explain what that means for us in plain language?

[Sam Taub]

Usually when people talk about bond yields, what they're referring to is yield to maturity, which is a bond's annual percent return if you buy it and hold it to maturity. That depends on the face value of the bond, that is the amount that you'll get when the bond matures. And it also depends on the purchase price of the bond and also on the coupon rate or annual interest rate, if there is one. Most bonds are traded on a market just like stocks. And typically you buy a bond at a discount for some amount less than its face value. And the bigger the discount, the higher the yield. Now, some types of bonds, such as short term treasury bills, are zero coupon bonds, meaning they don't pay interest. In that case, the yield is just based on the face value, the discounted purchase price and the number of years to maturity.

[Sean Pyles]

Can you talk about what might make a yield go up or down in the bond market?

[Sam Taub]

I'll use an example of something that makes yields go up if something freaks out the bond market. A recent example being the U.S. government credit rating downgrade. That tends to make people sell bonds, which lowers their purchase prices and thus increases their yield yields. That's why when investors say things like the 10 year treasury yield just shot up to 5%, they're saying that as a bad thing. When yields suddenly go up, it usually means that investors have lost some degree of confidence in the borrower's ability to repay.

[Sean Pyles]

And the 10 year treasury bond yield going up to 5% is bad for the government, but it can be good for people who buy the bonds. Right, because you're getting a better return on the bonds.

[Sam Taub]

That's correct. Even after the recent downgrade, the US Government still has an extremely high credit rating and a default is still considered extremely unlikely. So for the individual investor, it just means a higher yield, which is good. Now, it's probably worth noting here it's bad for the country because higher yields mean the government has to pay more interest and, and that could eventually force us to cut spending and increase taxes just to afford the interest payments. But that's kind of a later problem that individual investors can't really do much about.

[Sean Pyles]

We'll just keep kicking that can down the road.

[Alyssa Elizabeth Ayola]

Now we understand the basics of bonds. Tell us, Sam, how can we fit that into our investing strategies since bonds.

[Sam Taub]

Are fixed income, since you know exactly what your return will be at the time of purchase, bonds provide a level of certainty that other types of investments like stocks don't have. Longtime listeners have probably heard us say things like the average annual return of the stock market is 10% per year, but that's just a historical average. We don't necessarily know what stocks will be worth in one or 10 or 20 years, but it's different with bonds, the returns are predictable. The downside of that is that bonds usually don't make you as much money as more uncertain types of investments like stocks. 10% per year is the average annual return of the stock market, but that would be considered really high for a bond yield.

[Alyssa Elizabeth Ayola]

So, Sam, would you say in that case that bonds can be great for diversification then to help manage risk?

[Sam Taub]

Exactly. A typical investment portfolio is a mix of bonds, which give you that predictability but usually kind of low returns, and stocks, which are less predictable but generally make you more money over time.

[Sean Pyles]

And as people are trying to figure out how bonds might fit in with stocks as well in their own portfolio, a lot of financial advisors will suggest that folks who are younger and have more time until retirement invest primarily in stocks because of their potential for greater returns compared to bonds on average. But as you get closer to retirement, bonds can be a safer, less risky investment.

[Alyssa Elizabeth Ayola]

Now that we are all caught up on what bonds are, let's get to the first listener question, which comes from Teal, who sent us an email. Here it is read by our producer, Tess Viglund.

[Tess Viglund]

Hey nerds, Hoping you can talk about savings bonds on your podcast. My grandparents bought me a ton of savings bonds when I was a child and I cashed them when I was in college and they paid for all my textbooks, laptops, and even some living expenses during my six years in school. I have young children and it's unlikely we'll be in a position to pay for higher education for them, but would like to help them how I can with whatever they need getting set up in their young adult lives. A car, college textbooks, furniture for a first apartment, et cetera, et cetera. Here's my questions. Are savings bonds even a good investment? Are there better options? We don't know for sure. Our children will even pick higher education and we want them to be able to have flexible spending options. When is a good time to buy savings bonds? When is not a good time to buy? If they are a good option, how do you even purchase them?

[Sean Pyles]

Thank you Teal, and thank you Tess. Okay, so our listener has the financial goal of saving for their kids, future education, and maybe some living expenses, whether they go to college or another path. There are a lot of different ways to save for this type of expense, but our listener is specifically interested in bonds, so we'll start there. There are two types of bonds that are specifically crafted to help pay for education expenses. Series EE and Series I bonds. And these are federal bonds. Sam, can you give us a brief explanation of each and why are they beneficial? Any drawbacks? All of that.

[Sam Taub]

So these are both non marketable government bonds that are designed for long term savings purposes. Series EE bonds earn a fixed rate of interest and the Treasury Direct website notes that at current rates they are guaranteed to double in value in 20 years. Now series I bonds are designed to protect your money from inflation. They have a variable interest rate that changes every six months. It's typically 1.10% plus the current inflation rate at the time of the latest adjustment. In both cases there's a minimum purchase of $25 and a maximum purchase of $10,000 per calendar year. These are both federally taxable but exempt from state tax. Both types of bonds can be cashed in early after a minimum of 12 months, but you forfeit the last three months of interest if you do that.

[Sean Pyles]

Some folks really like EE or I bonds because the interest earned on them can actually be excluded from your federal taxes if you use the bonds for qualified educational expenses. And that can can be pretty sweet. But you do have to follow some really specific rules around which educational expenses that you can use the bond money for. Otherwise you won't get that tax benefit.

[Alyssa Elizabeth Ayola]

Gonna have to consider that for my son's college fund. But there are other bonds that folks can use to save money for expenses that come with fewer guardrails than Series EE and Series I bonds. Can you outline another bond or two that might help our listener or other people like me looking to save for education expenses?

[Sam Taub]

Sam Regular treasury bonds are also state tax exempt and also available in long maturities like 10, 20, or 30 years. And much like Series EE savings bonds, you'll know exactly how much you earn if you're going to hold them to maturity. The main thing that distinguishes treasury bonds from savings bonds is that you can sell them before maturity. There's no interest penalty for that. But if you sell a bond for a lower price than you paid for it, you won't get all your money back. If you sell for a higher price, you'll earn a profit, but the profit will be subject to capital gains tax. Now those fewer guardrails can be a blessing or a curse. They give you more flexibility if life goes in an unexpected direction and you need money sooner than but otherwise you do have to kind of resist the temptation to sell early.

[Sean Pyles]

Our listener also has some pretty specific questions about buying bonds, namely whether there's a specific time that is better to buy them or not good to buy them, and also how to buy them. So what should our listener know here.

[Sam Taub]

Well, I'll start with the how you buy Savings [e-mail] you set up an account there, and that lets you buy them and manage them and cash them out out. Savings bonds, again, are non marketable, which means they don't trade and they're not sold at a discount. So there's really no way to time the market with savings bonds because there is no market. The best time to buy them is whenever it makes sense for your long term financial goals. With treasury bonds or other types of bonds, it's different. You can buy Treasury Bonds via TreasuryDirect, but you can also buy them through brokerage accounts that offer individual bonds. Hypothetically, you might luck out and buy a bond at an unusually steep discount, meaning a very high yield. But generally speaking, trying to time the market is easier said than done.

[Sean Pyles]

At least timing it successfully.

[Sam Taub]

Mm.

[Alyssa Elizabeth Ayola]

We're gonna shimmy along to the second question, which our producer, Tess, is gonna read again.

[Tess Viglund]

Oh, well, here I am again.

[Sean Pyles]

All right, it does. Hi.

[Tess Viglund]

I have a series EE savings bond that I was gifted a long time ago. It reached maturity four years ago, but I don't know what to do with it. I've tried Googling, but I ended up more confused. How do savings bonds work and how do I cash in? Thanks for your help, Valerie.

[Sean Pyles]

All right, Valerie's question is pretty straightforward. So, Sam, I know you touched on this earlier, but how do savings bonds work?

[Sam Taub]

Work? As we've mentioned, series EE bonds earn a fixed rate of interest. They'll double in value in 20 years at current rates. But given that Valerie's bonds have already matured, she doesn't need to worry about forfeiting interest to early withdrawal penalties when she cashes them in.

[Alyssa Elizabeth Ayola]

And then how can Valerie cash them in?

[Sam Taub]

So the best place to go for this information is the Treasury Direct page on how to cash out savings bonds bonds. They have thorough instructions, but basically it depends on whether the bonds are paper or electronic. Nowadays, bonds are only offered electronically through treasurydirect.gov but they used to also be available as paper bonds. And given that she said that these bonds were gifted a long time ago, they might be that if it's paper, it's a matter of calling a bank she has an account with and asking if they'll cash them. If it's electronic, she'll need to log into treasurydirect.gov and cash them there.

[Sean Pyles]

And are there any tax considerations that Valerie should be aware of here?

[Sam Taub]

Yeah, income from savings bonds is exempt from state and local taxes. But it is federally taxable. Treasury Direct, or the bank that cashes them in the case of paper bonds, will send her a 1099 Int form to include with her next federal tax return.

[Alyssa Elizabeth Ayola]

Now, after giving us a rundown of bonds and answering these two listener questions, do you have any final thoughts you want to leave with us about bonds?

[Sam Taub]

Sam if you're interested in buying individual Treasuries or municipal bonds or corporate bonds, you'll need a brokerage account that offers individual bonds because not all of them do. And NerdWallet's best online brokers for Bonds Roundup is a good place to start.

[Sean Pyles]

Love a good plug. Well, thanks for coming on, Sam.

[Sam Taub]

Of course, thanks for having me.

[Sean Pyles]

That's all we have for this episode. Remember, listener, that we're here to answer your money questions. So turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-N E R D. You can also email [e-mail] and don't forget, you can anonymously submit your budget for us to potentially review on a future episode. Just click the link in the episode description. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts and iHeartRadio to automatically download new episodes.

[Alyssa Elizabeth Ayola]

And here is our brief disclaimer. We're not your financial or investment advisors. This nerdy information is provided for general educational and entertainment purposes and it just might not apply to your specific circumstances. This episode was produced by Tess Wiglund. Hilary Georgie helped with editing. Nick Kharismi mixed our art and we want to give a big shout out to NerdWallet's editors for all of their help.

[Sean Pyles]

And with that said, until next time, turn to the nerds.

[Alyssa Elizabeth Ayola]

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[Tess Viglund]

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