Savings Bonds as Interest-Earning Travelers Checks

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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.