How to Invest in Treasury Bills (T-Bills)

Quick answer

• T-bills are short-term debt securities issued by the U.S. Treasury.
• They are considered very safe investments with minimal risk of default.
• You can buy T-bills directly from TreasuryDirect.gov or through a brokerage account.
• Maturities range from a few days to 52 weeks.
• T-bills are sold at a discount and pay their face value at maturity.
• Interest earned is subject to federal income tax but exempt from state and local taxes.

What to check first (before you invest)

Time Horizon

Before investing in T-bills, consider when you’ll need access to your money. T-bills are best suited for short-term goals, typically less than a year. If you need funds for an emergency or a purchase within the next few months, T-bills can offer a safe place to park cash while earning a modest return. If your goals are longer-term, you might consider other investment options that have the potential for higher growth, though with greater risk.

Risk Tolerance

T-bills are among the safest investments available because they are backed by the full faith and credit of the U.S. government. This means the risk of losing your principal is extremely low. If your primary concern is capital preservation, T-bills align well with a low-risk tolerance. However, if you are comfortable with the possibility of market fluctuations in exchange for potentially higher returns, you might explore other investment avenues.

Emergency Fund

Your emergency fund should be fully established before you consider investing in T-bills for other purposes. An emergency fund is designed to cover unexpected expenses like job loss or medical bills. It should be held in highly liquid and safe accounts, such as a high-yield savings account or money market fund, where it’s readily accessible. T-bills can be a component of an emergency fund if the maturity aligns with your potential need for cash, but ensure you can access funds without penalty.

Fees and Tax Impact

While T-bills themselves don’t have management fees when purchased directly from TreasuryDirect, brokerage accounts may charge transaction fees. It’s crucial to understand any fees associated with buying or selling T-bills through a broker, as these can eat into your returns. Regarding taxes, the interest earned on T-bills is taxable at the federal level but is exempt from state and local income taxes. This can be a significant advantage for those living in states with high income tax rates.

Account Type

You have two primary ways to invest in T-bills: directly through TreasuryDirect.gov or indirectly through a brokerage account. TreasuryDirect is the U.S. Treasury’s online portal for buying securities. It’s straightforward and avoids broker fees. Alternatively, many brokerage firms offer T-bills, which can be convenient if you already have an account and want to manage all your investments in one place. Compare any potential fees or account minimums between these options.

Step-by-step (simple workflow)

1. Determine your investment amount: Decide how much money you want to invest in T-bills. This should be funds you won’t need for the duration of the T-bill’s term.

• What “good” looks like: You’ve allocated a specific sum that aligns with your short-term savings goals and doesn’t jeopardize your essential expenses or emergency fund.
• Common mistake: Investing money needed for upcoming bills or essential living expenses.
• How to avoid: Before allocating funds, create a clear budget and ensure your emergency fund is robust.

2. Choose a T-bill maturity: Select a T-bill maturity date that matches your time horizon (e.g., 4 weeks, 8 weeks, 13 weeks, 17 weeks, 26 weeks, or 52 weeks).

• What “good” looks like: The maturity date aligns precisely with when you anticipate needing the funds, minimizing the need to sell before maturity.
• Common mistake: Choosing a maturity that is too long or too short for your needs.
• How to avoid: Map out your short-term financial obligations and choose a maturity that accommodates them.

3. Open a TreasuryDirect account (if buying directly): If you plan to buy directly from the U.S. Treasury, visit TreasuryDirect.gov and follow the steps to open an account.

• What “good” looks like: You have successfully created and verified your TreasuryDirect account, ready to make purchases.
• Common mistake: Providing incorrect personal information, leading to delays or account issues.
• How to avoid: Double-check all personal details, including Social Security number and bank account information, for accuracy.

4. Or, use a brokerage account: If you prefer to use a broker, log in to your existing brokerage account and navigate to their fixed-income or bond trading section.

• What “good” looks like: You can easily locate T-bills within your brokerage platform and understand the purchase process.
• Common mistake: Not checking for brokerage fees or minimum investment requirements.
• How to avoid: Review your broker’s fee schedule and any specific rules for purchasing government securities.

5. Place your order: On TreasuryDirect or your broker’s platform, select the T-bill you wish to purchase, specifying the maturity and amount. T-bills are typically sold at auction.

• What “good” looks like: You’ve submitted your order for the desired T-bill with the correct parameters.
• Common mistake: Misunderstanding how T-bill pricing works (discount basis).
• How to avoid: Understand that you pay less than the face value, and the difference is your interest.

6. Fund your purchase: Ensure the necessary funds are available in your linked bank account or brokerage account to cover the purchase price.

• What “good” looks like: Sufficient funds are available to cover the discounted price of the T-bill.
• Common mistake: Insufficient funds in the linked account on the settlement date.
• How to avoid: Monitor your bank or brokerage balance leading up to the settlement date.

7. Receive your T-bill: Once purchased, the T-bill will be held electronically in your TreasuryDirect account or brokerage account.

• What “good” looks like: Confirmation of your T-bill purchase is visible in your account statement.
• Common mistake: Not keeping track of your holdings and maturity dates.
• How to avoid: Regularly check your account dashboard to confirm your investments and upcoming maturities.

8. Hold until maturity: The simplest strategy is to hold the T-bill until its maturity date.

• What “good” looks like: You’ve held the T-bill for its full term without needing to sell it early.
• Common mistake: Selling a T-bill before maturity, potentially incurring losses or missing out on the full return.
• How to avoid: Only invest in T-bills if you are confident you won’t need the funds before the maturity date.

9. Receive your principal plus interest: On the maturity date, the full face value of the T-bill is credited to your linked bank account (TreasuryDirect) or brokerage account.

• What “good” looks like: The full face value of the T-bill is deposited into your account, representing your principal plus accrued interest.
• Common mistake: Not understanding that the interest is the difference between the purchase price and face value, not a separate payment.
• How to avoid: Review your transaction history to see the purchase price and the final maturity value.

10. Reinvest or use funds: Decide whether to reinvest the proceeds into new T-bills or use the funds for your intended purpose.

• What “good” looks like: You have a clear plan for the money received, whether it’s for spending or further investment.
• Common mistake: Letting the money sit idle in a non-interest-bearing account after maturity.
• How to avoid: Have a plan for the funds before they mature, or set up automatic reinvestment if available.

Risk and diversification (plain language)

• Low Default Risk: T-bills are backed by the U.S. government, making them one of the safest investments. The chance of the U.S. government failing to pay is considered extremely low. For example, if you lend money to a very reliable friend with a strong track record, that’s a bit like investing in a T-bill.
• Interest Rate Risk: While T-bills are short-term, their prices can fluctuate in the secondary market if interest rates change. If rates rise after you buy a T-bill, its market value might decrease if you needed to sell it before maturity. Think of it like having a fixed-rate loan: if new loans offer higher rates, yours becomes less attractive.
• Inflation Risk: The fixed return on T-bills might not keep pace with inflation. If inflation is higher than the T-bill’s yield, your purchasing power will decrease over time. For instance, if your T-bill earns 3% and inflation is 5%, your money buys less than it did a year ago.
• Liquidity: T-bills are generally liquid, meaning you can sell them before maturity in the secondary market. However, you might receive less than you paid if market interest rates have risen. It’s like selling a concert ticket before the event – you might have to lower the price if demand has shifted.
• Reinvestment Risk: When a T-bill matures, you’ll need to decide what to do with the money. If interest rates have fallen, you might have to reinvest your money at a lower yield. This is like finishing a lease on an apartment and finding that new leases in the area are cheaper.
• No Diversification Within T-bills: Investing all your savings in one T-bill maturity doesn’t diversify your risk. Diversification means spreading investments across different types of assets. T-bills are a single asset class.

During market drops, T-bills can act as a safe haven. Investors often move money into short-term government debt like T-bills to preserve capital when stocks or other riskier assets are falling. This can lead to increased demand and potentially slightly better yields for T-bills during turbulent times, but their primary role is capital preservation, not market timing.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes