Savings bonds are loans American citizens make to the government. There are two types of savings bonds: the Series EE U.S. Savings Bonds (or Series EE Bonds) and the I Savings Bonds. Both types of bonds are low-risk investments that pay interest for up to 30 years. The U.S. Treasury stopped issuing paper savings bonds – you merely register to buy the securities at the website, www.treasurydirect.gov. Like any other investment, you will need your parent or guardian to open up a custodial account in your name if you are a minor.
The way Series EE Bonds work is that you are promised a certain fixed interest rate over a 30-year period. The U.S. Treasury announces the interest rates for new Series EE Bonds each year on May 1 and November 1. At the time of this writing, the interest rate you would earn on a Series EE Bond is a measly 0.10% per year. You have to invest at least $25 in a Series EE Bond, but you cannot invest more than $10,000 in each calendar year. You can only cash in the bond after one year or more. However, if you cash in the bond before 5 years, you will lose some interest. When you cash in the bond or it matures, you will get the accumulated interest minus penalties for early redemptions, if any.
The I Savings Bonds are similar to the Series EE Bonds with one important distinction: the Series I Bond interest rate is adjusted periodically based on the inflation rate. Specifically, the interest rate is based on a formula, which adds a fixed interest rate, and a rate related to the CPI-U inflation rate. At the time of this writing, the annual interest rate you would earn in the I Savings Bonds is 1.64%.