Welcome to the world of Treasuries, where we maximize returns by investing with the US Government. I have covered Treasuries extensively over the last two years.
However, I haven’t peeled back the onion on Treasury Bills, also referred to as T-Bills. Let’s take a look at how T-Bills compare to other Treasuries.
What are Treasuries? Treasuries are bonds that the US Government sells at auction to institutional and retail investors. There are three types of Treasuries.
- Treasury Bills have short durations of less than one year.
- Treasury Notes have durations between 2 and 10 years.
- Treasury Bonds have durations between 20 and 30 years.
Today, I want to focus on T-Bills because they compete with other great products, such as High-Yield Savings accounts (HYSAs) and certificates of deposit (CDs).
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What are T-Bills? We know that Treasury Bills are short-term bonds that the US Government issues at auction—but why would you need them?
The government issues T-Bills in durations of 4, 8, 13, 17, 26, and 52 weeks. These timelines become essential when you talk about saving for a specific purpose.
T-Bills do not pay interest to your bank account; you buy them at a discount to par. When they mature, you receive the full par value—called zero coupon bonds.
Let’s say you purchase a $100 T-Bill for $95. You would receive the full $100 at maturity. This would be a 5% interest rate bond.
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The use case for T-Bills. The US Government backs the US Treasuries with its full weight and authority. Treasuries are the largest market in the world.
Investing in T-Bills is similar to investing in a savings account with Federal Deposit Insurance Corporation (FDIC) insurance. The FDIC and Treasury Department fall under the US Government.
Because of this relationship with the US Government, investors consider US Treasuries zero-risk investments. If the US Government defaults, we will have bigger problems than interest income.
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This security of principal allows us to use T-Bills for quick savings and a holding cell for an influx of cash.
You just received $5,000. Let’s say you just received $5,000 from a bonus at work. Your long-term plan is to purchase some nice furniture during the Memorial Day sale.
You have four months until Memorial Day, so invest in a 16-week T-Bill. Your $5,000 buys you a T-Bill that matures at $5,070—a rate of 4.6%.
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That’s an extra $70 you can put towards taxes on your furniture or a celebration lunch. You must have your money work for you at all times.
Why not a Certificate of Deposit or High-Yield Savings Account? An HYSA would probably be the best place to stash your $5,000 in the above case.
HYSAs are quick and accessible and don’t require any additional auctions or holding periods. However, the interest rate on HYSA can change overnight.
You may believe you would earn $70, but you could earn $40 or $50 based on falling interest rates. T-Bills guarantee your returns.
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Certificates of Deposit would also make an excellent place to hold your $5,000. However, they have one major disadvantage against all Treasuries, including T-Bills—taxes.
Treasuries are exempt from state taxes. Living in a high-income state like California or New York can shave 10-14% off of your interest income.
You must be very intentional with your money, so saving on state taxes can go a long way. If you have a large sum of money to invest, tax saving needs to be a priority.
The limits of HYSAs and CDs. The FDIC protects up to $250,000 per depositor per bank. If you have more than that amount, you would need to invest across multiple banks.
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T-Bills do not have an overall limit on how much you can invest. The individual limit for non-competitive bids is $10 million for one auction.
If you sold your house and have $300,000 and need to invest quickly, T-Bills can help. They can be a great safe haven when the market turns, or you need to invest for a short time.
Selling you T-Bills. However, selling your T-Bills before maturity can open you to market conditions. T-Bills are marketable securities, which means they trade on the bond market.
You can sell your T-Bills for a gain or loss depending on current interest rates. It’s best to hold your T-Bills until maturity.
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If you do not understand how T-Bills operate on the bond market, I recommend reading “The Bond Book” for further explanation.
Building a T-Bills Ladder. Because T-Bills offer lots of maturities, you can ladder them similar to CDs and Treasuries.
The goal of a T-Bill ladder is always to have fresh cash arriving in your account while locking in great rates over the spectrum of maturities.
For example, you may have T-Bills of $1,000 with maturities of 4, 16, and 52 weeks. The 4-week T-Bill will keep fresh cash in your pocket to ensure you can invest at the highest rates possible.
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You can also set your T-Bills to reinvest into the same maturity as it matures. For example, you can automatically reinvest your $1,000 4-week T-Bill into another 4-week T-Bill upon maturity.
This allows your T-Bills to act like a savings account and keep your money growing in the background of your life.
Are T-Bills safe in your emergency fund? Yes, however, a High-Yield Savings Account is the best place for an emergency fund.
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Once you have 6-12 months invested in a HYSA, you can move to more elaborate products like T-Bills or CDs.
The fear for T-Bills in your emergency fund is if you must sell immediately and your bonds take a loss upon transaction.
Conclusion. T-Bills are yet another way to keep your money working for you. Investing for interest is the first way for most people to earn passive income.
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Earning 4-5% on your money doesn’t seem like much, but standard savings accounts typically pay 0.01%.
T-Bills are great for people who need a holding area for their money. You have lots of control over maturities and reinvestments.
Learning about Treasuries is an excellent step to becoming a Passive Income Hero. Take your money seriously, and it will take care of you. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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