Treasury Bond Face-Off: Savings Bonds, Treasuries, TIPS: Which Product Is Right For Your Situation?

Getting money into a savings account can be one of the most daunting tasks of your life. Even scarier is WHERE you decide to save your money. 

This scenario is why many people keep their money in a standard savings account, earning 0.01% interest.

We can do better. We can repurpose our savings accounts into investment vehicles with a bit of education. Even better, the government can help us along the way.

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The government website TreasuryDirect.com offers many products to assist us in building wealth while protecting our capital. However, we must first learn about all of these products.

Getting to know Treasury products. Let’s get to know them before we put our Treasury products into the ring together.

Savings Bonds. There are two types of savings bonds: Series “I” Bonds and Series “EE” Bonds. Series “I” Bonds adjust with inflation, while the government guarantees Series “EE” Bonds to double in 20 years.

Treasury Bonds. There are three types of Treasury Bonds: Treasury Bills (1 month to 1 year), Treasury Notes (2-10 years), and Treasury Bonds (20-30 years). You purchase Treasury Bills at a discount to par value instead of receiving interest payments. Notes and Bonds pay interest semi-annually.

Treasury Inflation-Protected Securities (TIPS). Treasury Inflation-Protected Securities (TIPS) are the most confusing of the bunch. In short, the face value of the bond adjusts along with inflation while the interest rate stays the same. 

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For example, I have a 10-year TIPS with a 1.125% interest rate. I bought the bond for $200, but its current face value is $210.68. This means my interest payments should continue to rise throughout my ownership.

Let’s start comparing. Every American with a net worth under $1 million should purchase Series “I” Bonds. They are simply the best products available.

I use a net worth cutoff because there is an annual $10,000 limit on purchasing Series “I” Bonds. Therefore, high-net-worth individuals will not get as much value from these products as middle-class individuals.

I purchase $350 of Series “I” Bonds every month. I had a nice collection until I bought an RV this year. Now, I am rebuilding my Series “I” portfolio to reach at least $10,000.

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You cannot lose money on Series “I” Bonds, you don’t pay taxes until you redeem them, and they are exempt from state tax. If you use them for qualified educational expenses, you can avoid federal taxes. They are a one-stop shop of goodness.

I repeat: Series “I” Bonds are the best product, and everyone can maximize their usefulness—that’s why there is a limit.

Purchasing Savings Bonds for others. You can purchase $10,000/year of Series “I” Bonds per social security number. So a family of four can purchase $40,000 per year.

If you have young family members, such as nieces and nephews, Series “EE” Bonds can be a great resource. Imagine purchasing $50/month of Series “EE” Bonds for someone from one to twenty years old.

Then, as they turn 20, they can start drawing $100/month from their Series “EE” Bonds. If they are in college, that money could be tax-free. That’s a fantastic gift.

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For your money to double after 20 years, it needs an annual 3.5% interest rate. That rate should beat inflation over 20 years, so it’s not a bad deal.

From saving to investing. Disclaimer: I recommend purchasing bonds to hold until maturity. However, you can profit from the bond market and interest rates.

Treasury Bills are good when you have a huge influx of cash and want it to earn some yield. Let’s do some quick math.

Let’s say you have $10,000 you want to invest in Treasury Bills. At a 4.6% interest rate, for a 26-week bill, you would pay $9,775; it would mature at $10,000. You turned a quick $225 profit in six weeks.

Therefore, if you sell a house or a valuable collectible and want to invest your money temporarily, Treasury Bills are the way to go.

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Treasury Notes and Bills are great purchases when you see deals you want. For example, this year, I purchased 4.5% yielding 30-year Bonds. These are extraordinary long-term rates.

If rates drop to 1%, I will have massive capital gains on my bonds. However, as I stated, I will hold them until maturity. If you learn the ropes, you can profit from bond prices. However, the bond market is fiercer than the stock market, so be careful.

Treasury Notes and Bonds are for people who already have a high-yield savings account with an emergency fund inside. These investors already have money on the stock market.

Treasury bonds sit between savings and investing as a way to protect capital, avoid state taxes, and earn yields; they are for advanced users.

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The most complex of them all. TIPS are simply too complex for beginners, intermediates, and advanced investors. TIPS are for experts in the bond market.

There is an entire website called TipWatch that explains and tracks TIPS. I am still experimenting with TIPS, but as a middle-class investor, Series “I” Bonds are my preferred inflation hedge.

You must also pay capital gains on the increase in the face value of your TIPS. For example, if the face value jumps from $10,000 to $10,300, you would pay taxes on the $300 increase and the interest payments.

This can cause a lot of confusion. So, I recommend TIPS only to experts who take the time to read and learn the ropes. I am still learning, too, and will continue to report my progress.

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What’s right for you? If you are reading this, then Series “I” Bonds are right for you. Unless you need to invest $50,000+ per year in bonds, Series “I” Bonds work for almost every situation.

Once you have a fully-funded emergency fund, index funds, dividend growth stocks, and income investing products, you can circle back to Treasury Notes and Bonds. Use them as a way to diversify away from the stock market.

When you learn about the 60/40 portfolio, you will see that Treasury Notes and Bonds are major players in your long-term financial security. Until then, keep it simple with Series “I” Bonds.

Conclusion. The U.S. government has you covered. They have tools for every portfolio, starting with Series “I” Bonds. Make no mistake, Series “I” Bonds are the most powerful and valuable products on the bond and stock markets.

However, the $10,000 limit keeps major investors away. You should start your journey with Series “I” Bonds—with as little as $25.

Your Wealth is Your Choice

I set up the website to automatically withdraw my $350 and invest in Series “I” Bonds. Purchasing Bills, Notes, Bonds, and TIPS is a little more nuanced because they arrive via auction.

However, you can set up the TreasuryDirect website to withdraw money from your account and place it in a Certificate of Indebtedness account. This non-interest-bearing account holds your cash until the bond auctions begin.

You should be well on your way to Uncle Sam making your life better. It’s time to take the next step in your investing journey via TreasuryDirect. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing