Unleashing the Power of a T-Bill Ladder: Your Guide to Financial Mastery
Need to know how to invest in Treasury Bills (T-bills)? Let’s break it down to make it easier!
First off, what are Treasury Bills? Well, these are short-term loans you give to the US government. When you buy a T-bill, you lend your hard-earned money to Uncle Sam, and in return, you’ll get your original investment back, plus some extra bucks when the T-bill matures.
Now you may be wondering, what is the extra, or ‘interest,’ for T-bills? It might be confusing as T-bills don’t regularly pay out like typical investments. Instead, your earned dollars or the success of your investment is measured by the difference between the price you paid when you bought the bill and the amount you get back at the end (the face value of the T-bill).
Let’s look at an example. Suppose you buy a T-bill that’s worth $1500 after 12 weeks, but you only buy it for $1482.50. That means you’ll make an extra $17.50 by the end of those 12 weeks, without having to do anything at all.
Okay, so now onto where you can buy these T-bills? Well, there are lots of online brokerages, like Public.com, or even directly from the TreasuryDirect website where you can buy these.
A useful strategy for investing in T-bills is called a “T-bill Ladder”. The idea here is to buy several T-bills with different maturity times (like 8-12 weeks, 13-17 weeks, and 26-52 weeks). This way, you’re getting a steady stream of pay-outs often, maintaining a regular source of income.
In fact, a T-bill ladder can be a great way to earn some extra income! As each T-bill matures, you add another one to the ladder with the current interest rate. This method is considered very low risk and a solid defense against inflation.
Want to compare T-bills and Certificates of Deposit (CDs)? Typically, CDs offer higher yields than T-bills, but they’re not as liquid and often have fees if you need to cash out early.
Alright, so how does a T-bill Ladder look in real life? Imagine you have $15,000 ready. You divide it equally and buy a 3-month, 6-month, and 9-month treasury bill, each costs $5,000. After each T-bill matures, you just reinvest it!
When it comes to bonds – Bond Ladders can be more involving than Bond funds since you need to comprehend bond markets and track maturity dates. But if you’re not up for that, bond funds, managed by pros are a good alternative.
Treasuries can play a very crucial role for retirees. They provide a consistent income stream and are extremely safe as they’re government-backed. You may also find T-bills useful during inflation due to their short maturity.
Remember, though, just like every investment, T-bills have some elements of risk, notably with inflation or rising interest rates which can eat up your returns.
As for tax implications, T-bills are only taxed at the federal level. In terms of the return rates, based on 2023 records, a 3-month T-bill rate went as high as 5.20% during the second quarter.
Lastly, it’s important to note that bonds typically offer higher returns than T-bills, but they’re not as liquid and have longer terms.
To kickstart your treasury bill investment journey, platforms like Public, Moomoo, and Webull are popular choices among investors for their usefulness, offering free stocks, commission-free trading, and other investor-friendly features.
