How do savings bonds work

Definition of savings bond: what is it? How does this work?

by the KlarMacher editorial staff, 06/18/2019

Maybe your grandma left you a nice penny. Or life insurance is paid out. Or the capital-forming benefits that have been saved up for years become due. Such a financial blessing is basically a cause for joy. But where should the money go if it has not already been planned for a purchase? There is no or almost no interest on the good old savings account. Shares? Not everyone has the nerve for the ups and downs on the stock markets. Maybe a savings bond is the solution!

How does a savings bond work?

A savings bond is a fixed-income form of investment. That means: Your money is invested for a fixed term. The interest that you will get for it will be agreed in advance. You can usually decide for yourself when the interest is paid out. A “Normal” savings bond pays the interest once a year to an agreed account. With a so-called discounted or compounded savings bonds You will not receive any annual payments, but a higher amount will be transferred at the end of the term.

Usually, the interest on a savings bond is higher than that of a normal savings account.

Some banks also offer savings bonds, with which the interest rate increases annually until the end of the term.

With regard to the running time you have the choice with a savings bond: everything is possible from one to ten years. As a rule of thumb, the longer the term, the higher the interest. For one-year savings bonds, you currently get between 0.05 percent and 0.20 percent, for three-year savings between 0.25 percent and 0.6 percent and for six-year olds between 0.5 percent and 1.00 percent. As you can see, it pays to compare offers.

A savings bond has these disadvantages

Savings bonds have one major disadvantage: they are not flexible. As a rule, you will not be able to reach the specified assets during the agreed term. Exception: you change your mind about a contract that you have concluded online, by post or by telephone within 14 days; then you can use your right of withdrawal. After that, termination is no longer possible.

If you still really need the money, you have two options. You have to expect losses with both.

  • You can use the savings bond borrow. You take out a loan from the bank and deposit the savings bond as security. For that, of course, you have to interest pay - and they are usually higher than the interest you get.
  • You can use the savings bond resell, similar to life insurance. As a rule, however, a customer only buys the savings bond with one Discount. So he's not paying the price you paid. In most cases, however, you will make fewer losses than with the loan. If you would like to use this option, it is worthwhile to obtain comparison offers.

Investing in savings bonds is usually only recommended if you are unlikely to need the money during this period.

Tip: Some banks offer a special form flexible savings bonds at. With this type of investment, you can dispose of certain amounts every month without losses and also cancel any amounts exceeding this with a notice period of several months. For this flexibility, however, you have to accept somewhat worse conditions.

The savings bond offers these advantages

Savings bonds are considered very safe investment, because as with the savings book, the so-called statutory deposit insurance. So even if the bank you are putting the money with goes bankrupt, your money will stay with you.

All of these points speak in favor of the savings bond:

  • Depending on the agreement, you will receive the agreed interest once a year and you can count on it reliably.
  • You do not risk price fluctuations and can sleep peacefully.
  • You can choose the duration yourself.
  • There are usually no costs for acquisition, custody or administration.
  • You will receive your money back at a predetermined date and you will have planning security.
  • You can buy savings bonds for relatively small amounts, often from 500 euros.
  • A savings bond is safe: the statutory deposit insurance protects you against the loss of your assets.

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