Many of us tense up when we hear the word “investing.” We remember movies like Wall Street and Boiler Room where fast-talking traders lost millions on stocks they swore would pay off. Unsurprisingly, some of us decide that investing is just too risky for the average person to get involved in. But this is a myth: in fact, some investment vehicles involve little to no risk whatsoever.
Today, we will discuss one of the best: Treasury bills.
What Are Treasury Bills?
Treasury bills (also known as “T-bills”) are short-term securities sold to investors by the United States government. As an investor, you buy T-bills at a discount from the face value (or “par amount”) and receive the face value at some specified future date — anywhere from four days to 52 weeks.
For example, you might pay $4,990 for a Treasury bill worth $5,000. Once that bill matures, you would collect your full $5,000. The $10 difference between the $4,990 purchase price and $5,000 par amount is interest: your reward for loaning your money to the U.S. Department of the Treasury for that amount of time.
Why Should You Invest in Treasury Bills?
Treasury bills are the ultimate in secure, guaranteed returns. Compare the description above to other forms of investing — such as the stock market. When you buy stocks, you are essentially placing your money into the hands of one company (or several companies) and hoping they stay in business long enough to pay you a return.
Most companies do. It’s pretty rare for a publicly-traded corporation to completely fall off the map . . . but it has happened.
And what if there’s another 2008-style crash?
Chances are, you will lose some or all of what you put in. That’s the dark side of the risk/reward equation with stocks. Yes, the stock market historically returns around 10% annually (according to the investment literature) . . . but there is at least the possibility of loss. While I encourage investors to protect themselves with passive, diversified investing there’s no diversifying against a market-wide collapse.
Market crashes don’t really matter if you are young. The stock market has always (since its creation) bounced back from recessions, depressions, and slowdowns. The key is whether you are old enough to wait it out. A 55-year-old near-retiree probably isn’t. That’s where conservative investments come in.
Treasury bills are immune to this risk because they are backed by the federal government. The U.S. Department of the Treasury is literally obligated by law to repay Treasury bill investors the par amount of any T-bills purchased. Unless the government itself goes bankrupt (unprecedented, yet frighteningly possible in light of the recent shutdown) there is no such thing as a Treasury bill investor not getting repaid.
As an added bonus, interest on T-bills is exempt from state and local income taxes!
Bonds offer a middle-ground: they are more stable than stocks, but have higher returns than T-bills. Note, however, that bonds tend to be longer-term investments. 10- to 30-year terms are common, as I will discuss later on in this article.
In short: If you want high returns, stick with the stock market. Younger investors have longer time horizons and can afford to be aggressive. But if what matters to you is the safety of your investment capital (important for older investors and recent retirees), Treasury bills are tough to beat.
How Do I Get Started?
There are two ways to buy Treasury bills for your investment portfolio:
- Directly, from the U.S. Department of the Treasury at this website.
- Indirectly, through a bank or broker (like one of our cheap investing sites).
The advantage of buying direct from the U.S. Department of the Treasury is “cutting out the middleman” — and his fees. The disadvantage is that you will be acting totally alone and managing the entire process for yourself. Banks or brokers, conversely, are experienced in buying T-bills for their clients and can handle the “messy details” for you.
It’s also important to realize that Treasury bills are not purchased on demand like items in a grocery store. Rather, they are sold through auctions every Monday via one of the two following methods:
- Noncompetitive bids, where you agree to pay whatever discount rate is decided at the T-bill auction.
- Competitive bids, where you decide upfront which purchase price you will pay for a T-bill.
With competitive bids, the key difference is you may get less than your preferred purchase price, or exactly your preferred purchase price. It is impossible to know in advance which it will be. More importantly, competitive bids are generally restricted to purchases of $1,000,000 or more. So, in all likelihood, you will be making non-competitive bids.
It should also be noted that competitive bids cannot be placed directly through the Treasury. Only a bank, broker, or dealer can make these for you.
T-bills are available in the following denominations: $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and $1,000,000. Which ones (and how many) you purchase are 100% up to you.
What Are Some Alternative Investments That Behave Similarly to T-Bills?
Treasury bills are not the only option for risk-averse investors. Other investments with similar characteristics include:
- Treasury notes are like T-bills in most respects except for one: their time horizon. While Treasury bills have a maximum duration of 52 weeks, Treasury notes generally have maturities of two, three, five, seven, and ten years. Think of them as a safe place to park capital for known future expenditures (like your child’s college education). Interest on Treasury notes is paid semi-annually.
- Treasury bonds are an even longer-term investment: typically longer than 10 years, and as many as 30 years. Like Treasury notes, interest on treasury bonds is paid semi-annually.
Both of these investments are backed by the full faith and credit of the U.S. Government — just like T-bills are.
You can also go with the simple high yield savings account if you don't want the hassle of buying a bond.
Are There Any Downsides to Investing in Treasury Bills?
Of course. It all depends on your age, risk tolerance, and time horizon.
For a 22-year-old college graduate, T-bills are probably not the ideal investment. Such a person has 25–30 years to wait out whatever ups and downs the stock market experiences — and invest aggressively for maximum returns. Treasury bills will never pay as high a return as stocks can. As such, they should comprise a small percentage (if any) of a young investor’s portfolio — like we discussed in our article on asset allocation for college investors.
However, the reason T-bills pay lower returns is that they involve virtually no risk. Think back to our earlier discussions of older investors or soon-to-be retirees. These people (presumably) have already invested during their youth and middle-age years for high returns. What they need now, above all else, is safety — which Treasury bills provide in spades.
One other caveat: there is the risk of inflation (the slow, annual degradation of the dollar’s purchasing power) eating away at your Treasury bill returns. Typically, inflation occurs at 4% per year. If inflation rises to an inordinate extent, it could overshadow your T-bill returns. This applies to all investments, but especially to Treasury bills since the returns are lower than stocks and bonds.
Recap: If you are looking for a risk-free investment (and the peace of mind that your money will never be lost) T-bills are one of your best bets.
What are your thoughts on investing in Treasury bills in your portfolio?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.