Treasury Bills: What they are and how to buy

Treasury bills (also known as “T-bills”) are U.S. government-backed short term debt securities. These are low risk investments that you buy at a discount, and then profit on the difference when the term is up. They have been a popular option lately due to higher returns than usual, and many investors are using them to boost their savings.

Should you include T-bills in your portfolio? Here’s a more in-depth look to help you decide:

What are Treasury bills?

We’ve already covered the T-bill basics: it is a short-term, government-backed security with low risk (and generally, a lower reward.) They are the shortest-term government investment available, and mature between four weeks and one year. Typically, T-bill terms are four, eight, 13, 17, 26 and 52 weeks, and are sold in increments of $100 (up to $10 million.)

These securities don’t earn interest in the traditional sense. Instead, the difference between what you paid and what you ultimately earned is the “interest” you make on this investment.

But you should also know that economic changes, interest rates and inflation can all have an impact on T-bill rates. In periods of high interest rates, as we saw over the past couple years, investors tend to look for other higher-yield investments. Demand may also drop if the discount rate offered for a T-bill doesn’t keep up with the rate of inflation.

What Treasury bills are not

There are some other government-backed securities that can be confused with Treasury bills. Two of the most common ones are Treasury bonds, and Treasury notes.

The main difference between these investments is how long they take to mature. Treasury bills mature in a year or less, Treasury notes mature in two to 10 years, and Treasury bonds mature in 20 to 30 years. Before you purchase one of these government securities, make sure you understand their differences and what might work best for your portfolio.

Who should purchase a T-bill, and why are they popular right now?

A Treasury bill is ideal for the risk-averse investor who wants to earn some interest, but doesn’t want their money tied up for too long. It’s also a pretty safe place to put your cash if yields are high and you want to boost your savings. 

Any income from T-bills is exempt from local or state income taxes, but you do need to report that interest on your federal tax return. Just be aware of that stipulation around tax time.

How do you purchase Treasury bills?

You can buy a Treasury bill directly through TreasuryDirect, or from a bank, broker or dealer. You can also purchase a T-bill as part of a mutual fund. This is a nice option when you don’t want to worry about purchases or reinvestments. All you have to do is buy in or out when you need to.

A couple notes here: If you do opt for a mutual fund, there can be minimums required, along with an expense ratio. Also be aware that some mutual funds can have a mix of bonds and bills. If you do want a shorter term fund, you’ll have to look for that specifically.

If you buy through TreasuryDirect, you have to hold your T-bill for at least 45 days before transferring or selling (if it’s a new T-bill.)

Need more information? Check out TreasuryDirect for their guide to T-bills.

About Your Richest Life

At Your Richest Life, physician-focused financial planner Katie Brewer, CFP®, wants to help you build a successful financial future. For more information on the services offered, contact Katie today.

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