How and WHY to buy T Bills

When it comes to investing in T-Bills, the rule of thumb is that the longer the term, the higher the interest rate. But, as we’ve seen in recent years, interest rates can change, making short-term investments like T-Bills a smart choice. In this article, we’ll explain what T-Bills are, how to find the highest T-Bill rates, and how to actually buy them.

What are T-Bills?

T-Bills, or Treasury bills, are short-term investments issued by the United States government with terms ranging from four weeks to one year. They are a great option for those looking for a low-risk investment that offers a return within a relatively short period. T-Bills are a type of debt security, which means that you are lending money to the government in exchange for a guaranteed return.


Why Invest in T-Bills?

T-Bills offer a number of advantages to investors, including low risk, short terms, and tax benefits. Because they are issued by the government, they are considered a safe investment, and because they have shorter terms, your money isn’t tied up for a long period of time. Additionally, T-Bills are subject to federal taxes but not state and local taxes, making them an attractive investment for those looking to minimize their tax liability.

How to Calculate T-Bill Rates

Calculating T-Bill rates is straightforward. Simply multiply the amount invested by the interest rate and divide the result by the number of weeks in a year. For example, if you invest $100 in a T-Bill with a 3.25% interest rate, your return would be calculated as follows:

$100 x 3.25% = $3.25
$3.25 / 52 weeks in a year = $0.06
$0.06 / 4 weeks (the term of the T-Bill) = $0.015

So, for a four-week T-Bill, you would earn $0.015 in interest, meaning you would only pay $99.985 for the T-Bill, and receive $100 when it matures.

How to Buy T-Bills

T-Bills can be purchased in increments of $100 and are available through Treasury Direct, a bank, or a broker. If you prefer to go directly to the source, you can buy T-Bills through Treasury Direct, which will give you the most up-to-date rates without the added cost of a middleman.



T-Bill Alternatives

There are a couple different options when trying to get the highest rate of return on your cash such as high-yield savings accounts, money market accounts and I Bonds.

High-yield savings accounts are offered by many online banks, such as Ally Bank, and typically offer interest rates that are higher than those offered by traditional brick-and-mortar banks. These accounts are FDIC-insured, so your money is secure, and you can access your funds easily when you need them.

Money market accounts are similar to savings accounts, but they typically offer higher interest rates and have some restrictions on the number of transactions you can make each month. These accounts are also FDIC-insured, so you can feel confident that your money is secure.

It’s important to compare the interest rates, fees, and other features of these different types of accounts to determine which one is right for you. Some online banks may offer higher interest rates, but they may also have higher fees or less convenient features, so it’s important to weigh the pros and cons carefully before making a decision.


T-Bills vs I Bonds

I Bonds and T-Bills are both types of government-issued securities, but they have some key differences.

I Bonds are inflation-protected savings bonds issued by the U.S. Treasury. They pay a fixed rate of interest, plus an adjustable rate that is tied to inflation. The fixed rate remains the same for the life of the bond, while the inflation rate is adjusted twice a year based on changes in the Consumer Price Index (CPI). I Bonds are sold at face value, and you can buy them in denominations of $25 or more. They can be held for up to 30 years, and the interest is paid out tax-free if you use the funds for qualified educational expenses.

T-Bills, on the other hand, are short-term debt securities issued by the U.S. Treasury. They are sold at a discount to face value, and you earn interest by the difference between the purchase price and the face value when the T-Bill matures. T-Bills have maturities ranging from 4 weeks to 52 weeks, and they are sold through auctions at competitive bidding.

Pros of I Bonds:

Offer inflation protection, which can be useful if inflation is a concern
Fixed rate of interest remains the same for the life of the bond
Interest is tax-free if used for qualified educational expenses
Can be held for up to 30 years

Cons of I Bonds:

Low interest rates compared to other investments
Can only be redeemed after one year, with a three-month interest penalty if redeemed before five years

Pros of T-Bills:

Short-term investment with low risk
Guaranteed by the U.S. government
Competitive bidding process can result in higher interest rates

Cons of T-Bills:

Low interest rates compared to other investments
Interest is taxed at the federal level
Short term investment, meaning that your money is tied up for a shorter period of time.


To Sum it All Up

T-Bills can be a great option for short-term returns, particularly for those looking for a low-risk investment with a guaranteed return. With a straightforward calculation of interest rates and the ability to purchase T-Bills directly through Treasury Direct, it’s never been easier to take advantage of this investment opportunity. If you have money that might be sitting in an account earning little to no interest, consider investing in T-Bills for a quick return.