Choice is the spice of life. When it comes to building an emergency fund, saving for our children, or investing for the future, we have many options.
To effectively use these options, you must understand each of their individual metrics and make decisions that best suit your income needs.
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What are US Treasuries? The US government runs on taxes and debt. Americans can participate in funding the government by purchasing US Treasuries directly from the government.
US Treasuries are the most traded and liquid securities on the bond market. Understanding how US Treasuries work is vital to building a knowledge base of the various other markets (stocks, real estate, cryptocurrencies, commodities).
The US offers a few types of Treasuries, but today, I want to focus on the three classes of standard bonds:
- 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.
How do you decide which Treasury product suits your unique household needs? Let’s start by looking at every household’s three needs: an emergency fund, savings plan, and investment portfolio.
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Why do you need an emergency fund? An emergency fund is the lifeblood of running a successful household—you cannot thrive without one.
You want to begin your journey with a $1,000 emergency fund and steadily grow it to 1-2 years of expenses.
You can use a tiered emergency fund by keeping $5,000 in a high-yield savings account and layering in certificates of deposit and Series “I” Bonds.
The government issues T-Bills in durations of 4, 8, 13, 17, 26, and 52 weeks, and you can also leverage these in your emergency fund.
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What do T-Bills offer over HYSAs and CDs? They offer no state taxes, which can lead to much higher yields in locations like California and New York.
You can also create a T-Bill ladder to get the perfect amount of yield and availability. On average, T-Bills yield more than HYSAs, but HYSAs give you instant access to resources.
Using Treasury Notes and Treasury Bonds in emergencies can be risky because you may need to sell before maturity. Selling early puts your principal at the whims of the bond market, something you don’t want to do during an emergency.
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What is a savings plan? We all must save for various people and throughout our lifetime. Your emergency fund is not your savings account. You shouldn’t ever plan to use your emergency fund.
Therefore, you need to establish another HYSA strictly for future savings like a house down payment, furniture, children’s college, vacations, etc.
Treasury Notes come in flavors of 2, 5, and 10 years, making them perfect for particular needs.
Treasury Notes are excellent because the money is far from you (inside the TreasuryDirect website), but you receive semi-annual interest payments.
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You can use these interest payments to reinvest into high-yielding products like preferred shares, closed-end funds, and dividend stocks. I called this scenario high-yield bond reinvestment.
For example, let’s say you buy a $10,000 10-year Treasury Note at 4.5%. It would pay you $225 twice a year. You can invest that money into a monthly closed-end fund that yields 10%.
If you reinvest all $4,500 of interest payments over the ten years, you can create a $37 monthly paycheck for the rest of your life—enough for McDonald’s once a month.
What is an investment portfolio? There are three stages of money: the past (debt), the present (savings), and the future (investing). We all need to invest to secure our family’s future.
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We want to invest at levels much higher than inflation; however, as we age, we also want to protect the principal.
Treasury Bonds can give us decent yields, protect capital, and appreciate value. Bonds gain or lose value in relation to current rates.
If you have a 30-year Treasury Bond that yields 4.5%, at some point over 30 years, the government could lower rates to 2%. This will increase the price of your 4.5% bonds.
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Imagine having 4.5% Treasury Bonds during the 2020 pandemic when bond yields were 1.5%. I prefer buying 30-year Bonds when they yield over 4%—I think that is the sweet spot.
We want to invest in many things throughout our lives before retirement: business, real estate, creativity, and dividends.
Treasury Bonds can give you a pension-like income to provide a base level of security. Ideally, you could fund your life on Treasury Bonds, and use dividends and real estate for extras (vacations, eating out).
However, you would need millions of dollars to generate enough income to live at 4.5%. However, earning $20,000 annually from Treasury Bonds would be a fantastic addition to your passive income.
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Bills vs. Notes vs. Bonds. Before you invest in Treasuries, you want to be very intentional with your purpose.
Each of the different types of Treasuries has its metrics, and they compete against other products in their duration categories.
You can also find these specific Treasures in exchange-traded funds like Treasury Bills (BIL), Treasury Notes (ILTB), and Treasury Bonds (BLV).
You can mix and match your Treasuries to create the ultimate Treasury ladder. Personally, I think high-yield Treasury Bonds (20 or 30 years) are outstanding for long-term investing.
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Conclusion. Most people do not use a high-yield savings account, let alone invest in Treasuries.
Treasuries were my first step into earning passive income with my money. Don’t let the TreasuryDirect website intimidate you; it is easy to navigate with a bit of practice.
The goal of investing in Treasuries is to become more intentional with your money. Earning 4-5% may not change your life, but it’s better than paying 9-10% on a personal loan.
Once you learn how to leverage money to reach your short-, medium-, and long-term income goals, you’ll be well on your way to creating generational wealth.
Congratulations on taking the first step to becoming a more informed investor and diligent saver. Welcome to the Elite Savers of America! 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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