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U.S. savings bonds are fairly safe investments

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Question:I would like to buy U.S. savings bonds for my grandchildren. Are they still a good investment, or am I an old fogy?

Answer: Savings bonds aren't the most exciting investment, nor do they have the greatest earnings potential. So you wouldn't want your grandchildren to have all their money in bonds.

But if the recent economic uncertainty has taught us anything, it's that everyone, kids and old fogies alike, should have at least a portion of their investments in fairly safe investments.

Savings bonds fit the bill — especially if you buy series I inflation-indexed savings bonds, or I-bonds. The interest rate on I-bonds purchased through April 2002 is 4.4 percent — considerably higher than the going rate on bank savings accounts and money-market mutual funds.

That rate will apply for the first six months after the bond is issued. The government adjusts the rate each May and November, based on the rate of inflation for the preceding six months.

I-bonds purchased now are also guaranteed to yield a fixed rate of 2 percent over the rate of inflation for the entire 30-year life of the bond. Even if inflation fluctuates in the future, the fixed rate plus the inflation component should offer an attractive combination.

I-bonds are sold at face value, in denominations as low as $50, at financial institutions and online at www.savingsbond.gov. Earnings are added every month, and interest is compounded semiannually.


Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington, D.C. 20006. Or send an e-mail to jbodnar@kiplinger.com.