In the current interest rate environment, there are a number of good alternatives to EE savings bonds. For EE bonds purchased between May 1 and October 31 2007, the interest rate is fixed at 3.4% for the life of the bond. The bond won’t reach face value for 20 years, and pays interest for 10 years after that. When you factor in inflation, which has averaged around 3% annually for the last 20+ years, the real return on the bond is practically zero.
For investors looking for security with short to medium term funds (up to 5 years or so), FDIC insured CD’s and money market accounts are available that pay as much as 5%. Fixed annuities are also an option, paying comparable rates to CD’s with additional tax deferral advantages.
Investors with longer investment horizons would be well served to look to the stock and corporate/muni bond markets. Over the 20 year time span that it would take for a new EE bond to mature, stocks have averaged over 11% per year since 1926 and have always given returns that are higher than the rate of inflation. Such past performance does not guarantee future results of course, but having a good chance of getting significantly inflation-beating returns is better than EE bonds, which guarantee that you won’t.
I disagree strongly with getting an interest only mortgage and putting your money in a guaranteed investment like EE bonds. As the current downturn in the housing market vividly demonstrates, appreciation is not a given in the short to medium term, and depreciation is very possible in real estate. This doesn’t mean that paying off a normal mortgage is always the best financial option, but the security of owning your home outright, with a line of credit attached for emergency use, is hard to argue with.
Overall, EE bonds are an investment that has become unappealing due to market circumstances. There are better places to put your money for the short or long term.