What is a good interest accruing savings bond?

Question

I got a good chuck of money from a car accident settlement and I want to put $5,000 of it in a savings bond.I looked at a website called Treasury Direct. It sounded real good. It's backed by the U.S. Treasury and everything. However, it only accrues interest every six months. That means my bond would only get interest twice in a whole year. That's crazy. I want to know what reliable savings bond service accrues a reasonable amount of interest EVERY month? Also what constitutes a reasonable amount of interest?

Answer 1

There are a bunch of questions I have that you don't mention - is there a particular reason why you have decided on a savings bond, instead of the plethora of other places you could invest your money (e.g., ETFs, mutual funds, individual stocks, etc.)?  However, you did say you want to put it into savings, so let's focus on that.

The Treasury Direct system will still pay you the interest rate stated for the period, but they wait until the end of the six months to pay the interest.  You seem to argue that it should be paid monthly, and it could be, but the amount you would receive on a monthly basis would be a tad bit less than one sixth of what you would receive at the end of the six months.  The Feds prefer to only pay every six months due to the onerous record keeping that would be required.  The important this is to realize that you still get the same amount of money as interest either way.

If your concern is that you will be tying up the money for too long, have you considered laddering with CDs?  Take a look at http://search.yahoo.com/search?fr=ush_ma... for several articles on how to do this.  In essence, depending on the time frame you select, a portion of your investment could be structured so that it matures once a month (e.g., 1 CD for a month, 1 for 2 months, 1 for 3 months, etc.), allowing you to have access to a portion of your investment.  

As far as what a reasonable amount of interest is, it depends on the risk you want to take.  Treasury Direct is backed by the full faith and credit of the US government, so many people consider it to be the risk-free rate.  Banks and savings and loans that are insured by the FDIC, which is pretty close to the full faith and credit of the US.  Slightly more risky are money market mutual funds, which have no guarantee or insurance.  As you take on more risk, the interest rate for a given time frame will/should be higher (there are some instances when this isn't always true, due to market disturbances and how the economy is doing).  So whatever the market is offering in terms of interest rates is, by definition, a reasonable amount.  Hope this helps.