Cashing the wrong savings bonds can hurt your financial future

Did you know not all savings bonds earn the same rate of interest? AND, did you know that there are more than 50 different interest rates for EE Bonds since they began being issued in 1980?

If you didn't know these two small but very important facts about savings bonds, you're not alone.

The majority of savings bond owners have a difficult time keeping track of the different rules and regulations concerning their rainy day investment. Unfortunately, rainy days are upon us, and with the gloom and doom of the recession hanging over our heads, many savings bond owners are rushing to their banks to cash in at least some of their savings bonds.

In your haste to get to your bank, make sure you don't make the same mistake thousands of other bond owners do every year; turning in higher earning bonds to Uncle Sam that could have been kept in your portfolio!

When dispensing advice about cashing in bonds to Savings Bond owners, I frequently use the following example: Which would you cash in first, a bank CD earning 6% or one that's earning 4%? Easy, you dump the CD with the lower rate, and keep those earning the extra 2% in your pocket until needed. Then why would you treat your Savings Bonds differently?

The reason is that most of the time Savings Bond owners don't know what the interest rate is on their bonds. Unlike a CD, the interest rate that your savings bonds may be earning -- which varies from one six month period to the next - isn't printed on any bond. With some savings bonds earning as much as a whopping 8.95% and others a lowly 1.3%, it's easy to see which bonds you should cash-in, provided you have a report with the correct information.

There are a few sites on the internet where you can learn how well your entire portfolio of savings bonds is performing -- along with the various interest rates they are currently earning.

Another important fact to know: Savings Bond interest is tax-deferred (until redeemed or they reach their final maturity date) and is compounded and that interest builds upon itself, increasing the bond's earnings more and more every time interest is posted.. While it may not seem like a lot, every time interest is posted, compounding takes place and is what helps a bond reach four, five or even six times its face value by its final maturity date.

So before you just arbitrarily grab a handful of savings bonds from the pile, it's in your best interests, (I've waited several posts to use that one!), to learn about your savings bond portfolio's interest rates and maturity dates so that you aren't hurting the long term earnings potential of the remaining bonds in your retirement or college savings plan.

Jack Quinn is a personal finance writer and editor for SavingsBonds.com. Jack has helped Savings Bond owners better understand their investments for more than 15 years, saving clients from mistakes which could cost them thousands of dollars.