Savings Bonds as Interest-Earning Travelers Checks

by Philip Brewer on 8 November 2009 13 comments
Photo: Philip Brewer

Remember travelers checks? In the days before ubiquitous automated teller machines, they were a useful product. You could use them almost like cash — but you could carry more than you'd feel safe carrying in cash because if they were lost or stolen you could get them replaced. Well, savings bonds have all those features but one.

The thing you can't do with savings bonds is spend them like cash; you have to cash them in at a bank. (But then, I've sometimes had to cash travelers checks at a bank too.) In the US, pretty much any bank will cash US savings bonds. I assume there's something similar in other countries.

I first noticed this feature in the early 1980s — back before networked ATM machines made it easy to access the money in your accounts from anywhere you happened to be. Travelers checks were a useful tool for carrying your cash. But, when I noticed that several of their key features were shared with savings bonds, I started buying savings bonds instead — they paid interest. And I wasn't the only one. Anybody who needed to move around a lot — for example, military personnel — found them just as useful.

Basically, what you do is this: Buy savings bonds in small quantities over a period of time. This is easy to do; many employers let you buy savings bonds through payroll deduction and many banks will set up automated purchases as well. You can get them in all the denominations that you can get travelers checks and then some: $50, $75, $100, $200, $500, $1,000, and $5,000.

You can't cash the bond in until you've held it for a year, which is why I suggest buying gradually — you wouldn't want to put your whole emergency fund into savings bonds all at once. But, if you buy one every pay period or every month, pretty soon you'll have some that are more than a year old. Once that happens, they're basically just like travelers checks that you can only cash at the bank.

Go into pretty much any US bank with one or a few savings bonds (up to $1000 worth), and you can turn them into cash in just a few minutes. If they're lost or stolen or the paper certificate is damaged, you can get it replaced.

I've been enamored of savings bonds for a long time, but haven't talked about using them this way before here on Wise Bread, because they haven't had a competitive interest rate. Now, though, the rate on I bonds is looking pretty good.

As I mentioned back in July, the Consumer Price Index is about to surge. This isn't because inflation is rising (although I rather expect that to happen as well), it's just because it's now been a year since the big drop in oil prices.

The interest rate paid on I bonds is based on the CPI for the previous six months, so the effect of the oil price drop has already fallen off the calculation. Bonds purchased now will earn interest at a 3.36% annual rate for the next six months. That's a hard rate to beat in the current environment.

There's a 3-month interest penalty if you cash them in during the first 5 years, but even if you end up paying the penalty you still come out ahead compared to most vehicles for small savers. And if inflation rises (as I rather expect it to), the return just gets even better. Combine that with the features that make them like an interest-paying travelers check, and I think they're a pretty good buy right now.

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Guest's picture

Savings bonds save a lot of people who thought they had No money left.

John DeFlumeri Jr.

Philip Brewer's picture

 Buy an occasional savings bond and stuff it into a drawer.  It can come in very handy when your emergency fund runs dry.

That's why I was so unhappy over the past few years, with savings bonds paying such lousy rates--I wanted to recommend a strategy like this, but I didn't feel like I could do so in good conscience when you'd basically be locking in a terrible rate.  In the current environment, that's not so true.

Guest's picture

I like the idea of that - thanks! They aren't just the things you get from your grandma anymore!

Guest's picture

Are you amassing TIPS for retirement? Do you think that's a good idea? Would love to hear your thoughts on this.

As for travelers checks--their time has come and gone. They are almost impossible to cash here or abroad.

Philip Brewer's picture

I have some TIPS.  Of late I've thought the yield over inflation was a bit low.

Of course, the yield over inflation of the I bonds is even lower.  The difference, though, is that the I bonds can be cashed in early (for a small penalty).  If you had TIPS, though, and wanted to get out of them, you'd have to sell them--and if the reason you were selling was because you could get better rates on new TIPS, your selling price would be pretty low.

If I were really, really rich, I'd want to own enough TIPS that the income could support me at a modest standard of living.  Then I'd feel free to invest the rest of my portfolio with wild abandon.  Since I can't afford that many TIPS, I have to invest the rest of my portfolio with due attention to safety.

Guest's picture

Interesting enough to make me want to research I-bonds further.

Which brings me to my other point: what this article really needs is a link out. Like this:

Learn more about or purchase I-bonds here: http://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Philip Brewer's picture

The "I Bonds" link in my post is to an older post of mine where do an analysis of I bonds versus TIPS, and that post has a link to the Treasury site where you can buy them.

But, yeah, there's no need for anybody to read that before they make a decision.  I just thought it provided good context, because it talks about the obvious alternative (TIPS).

Guest's picture
David M

I love my I bonds. I purchased my bonds from around 2000 through 2004. My bonds have inflation rates of 3.4% to 1.1%. Additionally, I purchased them all with credit cards and racked up some serious frequent flier miles - unfortunatel the US government does not allow you to purchase savings bonds using credit cards any longer.

Guest's picture

Thanks for responding. I was conflating the 2 types--oops. I have cash on a money market and may move some to IBonds. Thanks for the post.

Guest's picture

Thanks for re-framing the use of the savings bond! I have only ever received them as birthday presents from my grandma when I was a kid. It sounds like others here have had that same experience!

Guest's picture

this is informative...i am currently doing posts on bonds on my blog and when i do savings bonds, i will link to this post. Nothing better than a blogger's personal opinion over those wall street people

Guest's picture
croatian1

When our grandson was born 2 years ago Nov. 7th, and the day he was born we bought him his first Savings Bond. He gets them for birthdays, Christmas and sometimes "just because". We still get him toys, clothes, etc, but we wanted to start an investment for him. I have gotten several friend's doing this now for their grandchildren also. My grandson's mom and dad are thrilled with these!! I also have his 2 uncle's doing this for him also. I just cannot get his other grandma on-board--would rather buy him more toys and junk instead of doing this.

Guest's picture
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I am agree with you.I have gotten several friend's doing this now for their grandchildren also. My grandson's mom and dad are thrilled with these!! I also have his 2 uncle's doing this for him also. I just cannot get his other grandma on-board--would rather buy him more toys and junk instead of doing this.I tell to my other friends about this site & its’s blog. I hope you will read my this comment and you will remember me. i appreciate this.Thanks a lot.
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