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The Real Cost of Paper U.S.Savings Bonds

Do you have a stack of U.S. Savings Bonds stashed under your mattress or in a safe deposit box that you’ve been collecting since childhood? You are not alone. Many people give their kids, grandkids, or nieces/nephews U.S. Savings Bonds as presents to encourage saving and slowly build wealth. While physical savings bonds can be fun to own and admire like a collector’s item, they have several limitations that make their ownership less desirable. Fortunately, all of these disadvantages can easily be overcome by converting the physical paper bonds into electronic bonds through SmartExchange by the U.S. Treasury.

The global financial markets park billions of dollars in the U.S. Treasury bond market because of its deep liquidity – the ability to quickly convert investments into cash. Unfortunately, paper U.S. savings bonds do not enjoy such deep liquidity; many banks charge a processing fee for cashing physical savings bonds, limit the number that can be cashed per day, or both. Such restrictions prevent investors from quickly accessing their money. Another drawback to owning physicalU.S.savings bonds is that they have to be maintained in a safe place to prevent damage, loss, and/or theft. While no one can cash the bonds if they are lost or stolen (savings bonds are registered and non-transferable), replacing lost, stolen, or damaged savings bonds can be time consuming and costly. Furthermore, if you want to know the value of your paper bonds, you must use special valuation calculators on the internet; a bit of a hassle. And most importantly, once paper savings bonds have matured, they also stop earning interest.  But don’t go wishing your Great Aunt Sally had given you that pogo-stick you had asked for; there’s good news…

All of the above-mentioned limitations can be eliminated. Simply open up a Treasury Direct account through the U.S. Treasury, and convert your physical savings bonds into electronic bonds using SmartExchange. One of the biggest benefits of conversion to electronic bonds is liquidity; such liquidity allows you to rebalance your portfolio anytime you want, without cost. You can easily sell your bonds and have the cash deposited directly into your bank account. Additionally, electronic bonds can not be lost or stolen. Another nice thing about electronic bonds is that, unlike paper bonds, account holders can login anytime to see the value of their savings bonds; no hassle. And lastly, electronic savings bonds never stop earning interest. Unfortunately, both paper and electronic bonds still have an early redemption penalty if cashed within 5 years.

It is important to note that such a conversion is irreversible. Once you have converted your physical bonds into electronic bonds, they cannot be exchanged back to paper bonds. In fact, the U.S. Treasury recently stopped issuing paper bonds – yet another reason to convert. All that being said, if you enjoy owning paper bonds because it reminds you of your dear Aunt Sally, or if you just like the look of paper bonds, then hold on to them…your mattress won’t mind.

Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Contact Ara at aoghoorian@acapam.com or on the web at www.acapam.com for a complimentary consultation.

The preceding content was originally published on the Financial Planning Association© blog and can be accessed by clicking either  www.FPAnet.org or http://blog.fpaforfinancialplanning.org