Are savings bonds a good way to save?
Savings bonds may or may not be the best way for you to save. It depends in large part on your savings goals and needs. Savings bonds are backed by the full faith and credit of the U.S. government. As such, they are generally deemed very safe investments. In addition, savings bonds are readily available and can be exchanged at most banks. They are also available through payroll deduction plans and automatic purchase plans. Moreover, interest earned on savings bonds is exempt from state and local taxes. In some cases, interest income may also be exempt when the proceeds are used for educational expenses. In short, if you have low tolerance for risk and want a tax-advantaged savings vehicle that is both liquid and simple to administer, you should definitely consider savings bonds.
Savers who shun savings bonds argue that it is difficult to calculate the value of savings-bond interest rates. Multiple rate schedules, interest rates pegged to other government securities, and yet-to-be-determined rate structures make it difficult for most consumers to calculate how much they are earning on their investments and how much "savings" they have accumulated on any given date. Moreover, most savings bonds will not protect you from inflation (Series I bonds are the exception, with semiannual adjustments for inflation). Also, there is a limit on the amount you can invest in savings bonds in any calendar year. Finally, your savings bonds cannot be sold or used as collateral for a loan.