Savings Bonds or Car Loan?

In our seemingly never-ending quest to rid ourselves of all debt forever, we made a move to pay off almost $2,000 of the loan on our Toyota Corolla. We sold a bunch of savings bonds! Was this a good idea or not?

It all depends on the interest rate we’d earn on the savings bonds versus the interest rate we’re paying on the loan. Let’s have a look.

To figure this out, we’ll need some facts. For one, the car loan is at 4%. Well, that was easy!

savingsbondsThe savings bonds, however, are much more complicated. To track the current value of all our separate paper bonds (stowed away in a fireproof box), I used the Treasure Department’s handy Savings Bond Wizard. To use it, you’re going to need to convince yourself that it’s 1998 again and download their software.  I’m not sure why they haven’t figured out a way to track your bonds with an online account, but needless to say, it’s the federal government, and they are incompetent when it comes to anything technology-related.  Except spying on citizens.

Man, if every federal agency had just had a few NSA snoops on staff, imagine how much better off they’d be.

After plugging in all of our savings bonds, graciously given to us by family members over the years, I came up with his listing:

Price Interest Value Rate Yield Issue Date
$50 $123.52 $173.52 4.00% 4.94% Mar 1989
$25 $58.40 $83.40 4.00% 4.98% Mar 1990
$25 $58.40 $83.40 4.00% 4.98% May 1990
$25 $58.40 $83.40 4.00% 4.98% May 1990
$25 $34.56 $59.56 4.00% 4.00% Mar 1993
$25 $33.02 $58.02 4.00% 4.00% Nov 1993
$100 $132.08 $232.08 4.00% 4.00% Nov 1993
$37.50 $48.66 $86.16 4.00% 4.00% Feb 1994
$25 $32.26 $57.26 4.00% 4.00% Mar 1994
$50 $63.00 $113.00 4.00% 4.00% Jul 1994
$50 $61.88 $111.88 4.00% 4.00% Oct 1994
$50 $61.88 $111.88 4.00% 4.00% Oct 1994
$25 $30.94 $55.94 4.00% 4.00% Oct 1994
$100 $123.76 $223.76 4.00% 4.00% Oct 1994
$25 $25.58 $50.58 1.34% 3.85% Mar 1996
$50 $50.56 $100.56 1.34% 4.03% Mar 1997
$50 $35.08 $85.08 1.42% 3.17% Mar 1998
$50 $30.60 $80.60 1.42% 3.04% Apr 1999
$37.50 $18.99 $56.49 1.42% 2.86% Sep 2000
Price Interest Current Value
$825.00 $1,081.57 $1,906.57


That shows the price originally paid, the interest accrued to the present date, the total value, the interest rate, yield, and maturity date. The interest rate is what the bond is earning currently. The yield is what the bond has earned, on an annualized basis, since it was purchased.

Really analyzing this will require us to look at the rules on savings bonds, which have changed over the years. For most of these bonds, the pre-1995 rules apply. These bonds basically earn a guaranteed interest rate, either 4 or 6%, until their maturity date, which could be 10, 12 or 18 years later. After that, they earn a guaranteed minimum, which looks to be 4%. They would earn a market-based rate if that was higher, but.. ha ha ha ha! Can you imagine? T-bills earning more than 4% today?? Ha ha ha ha!

For post-1995 bonds, it looks like they are guaranteed to double in value in 17 years, a 4.16% return, and after that you will only earn the market-based rate. Hence the paltry 1.42% returns seen in the later years.

For for these bonds, the answer to selling or not is, narrowly, sell. Technically, there are three bonds that haven’t finished maturing (purchased March 1998 and later) and so are still earning 4%, although the Bond Wizard shows those retuning 1.42%, so who know?

The post-1995 savings bonds are worth  $373.31 and are basically earning 1.4%. If kept in savings bonds, those post-1995 bonds would earn $5.22 a year, or 43 cents a month. And don’t forget, that’s taxed! So it’s even less than that.

But putting the $373.31 into the 4% car loan would save $14.93 a year, or $1.24 a month.  For post-1995 bonds, car loan wins.

For pre-1995 bonds, it’s a slightly different story. They are all earning 4 percent! That’s the same as the car loan! So it’s a push, right? No, wrong! Savings bond interest is taxed, while paying down your car loan results in a pure 4% gain to you, not taxable.

The pre-1995 bonds are worth $1,533.26 total. So if you’re accruing interest at 4% in the bond or in the car loan, that is a total of $61.33 a year, or $5.11 a month.

But again, the savings bond interest is taxable! And for us that means 25% disappears into Uncle Sam’s pockets. The bonds are actually getting us $46 a year, or $3.83 a month. For pre-1995 bonds, car loan wins again.

In total, by trading savings loans (approximately $50 a year in interest) for a car loan paydown ($76.26 a year in interest) we are keeping an extra $26 a year, or two bucks a month. That’s not much, but you do what you can, right? And the only work it took was going to the bank, cashing in the bonds, and making online payments.

The only way this move wouldn’t make sense is if you expected the savings bonds’ market rate to rise higher than 5%, about what it would take, before taxes, to beat the car loan rate. And that has a snowball’s chance in hell of happening in the next five years.

One added bonus: I don’t have to worry about the paper bonds sitting around in the house. They were in a fireproof box, but still, it doesn’t feel safe having that much money just around, ready to be lost or stolen or burned. Listening to Suze Orman’s show today, a woman called in saying she used to have $50,000 in cash in her underwear drawer because she had an irrational fear of money managers. She only recently put it in a bank. Gah! Can you imagine! I don’t even know what $50,000 looks like! Wouldn’t it take up, like, your whole socks section?!

Do you have any savings bonds burning a hole in your pocket? Do you have $50,000 in your underwear drawer? If so, what is your address?


  1. Also can you dispose of the safe deposit box and its associated fees now? Additional cost savings to add to that $2/month? =)

    We’re for simplification when possible, so even if it came out slightly ahead with the paper savings bonds (or if they weren’t taxable), we probably would have opted to sell them to make life a bit simpler.

    • Norm

      March 3, 2015 at 6:25 pm

      Yeah, the simplicity is an added bonus. I can delete those lines off my Net Worth spreadsheet, get those paper bonds out of my house and not have to think about them again. Yes, they were in a fireproof box in our house! Actually, the box was a graduation gift from my parents, specifically to hold the savings bonds! The only things in there now are birth certificates, passports, a bunch of old credit cards, and a bunch of loyalty cards I had no clue what to do with.

  2. When I got engaged to my husband, he had a lot of student debt. I had savings bonds that I’d mostly forgotten about. I was really disappointed in how little growth there had been in 20+ years. But it was an extra $1,500ish toward his debt.

    That said, I’ll admit that I never even considered comparing interest rates of the bonds vs. the loans. We were on a very limited income (disability plus about $30,000 a year from him), and we needed every red cent we could get.

    • Norm

      March 3, 2015 at 6:21 pm

      I think paying down debt is never a bad idea, unless maybe you’re selling stocks to do it. And even then it might be worth it if you’re paying off credit card debt, as long as there’s no big taxable gains. We’re making debt payoff a priority, even though the interest rates on it are pretty low.

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