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I’m an odd mix of fearless investor and Nervous Nellie. When it comes to long-term investing, I don’t allow anxiety or recession rumors to interfere with my investment plan. There’s simply too much evidence to show that history is on the side of the buy-and-hold investor.
However, I have a habit of acting like a new mother with my emergency savings account, hovering over it as if it’s going to disappear if I look away. Intellectually, I’ve always known it was ridiculous, but it wasn’t until I got into the habit of investing a portion of our emergency fund in Treasury bills that I finally relaxed.
Treasury bills
Now that I’m in the habit of putting our rainy day cash into Treasury bills (T-bills), I’m embarrassed it took so long for me to make a move. If you’re not familiar with how T-bills work, allow me to gush over the benefits.
Benefit No. 1
T-bills are available in increments of $100. That means if you only have $100 to invest right now, that’s okay. The maximum size T-bill you can purchase is $10 million (you know, in case that’s the size of your emergency fund).
Benefit No. 2
Spoiler alert: This is my favorite benefit. T-bills have a maturity date of one year or less. You can choose from T-bills that mature in four, eight, 13, 17, 26, or 52 weeks.
As someone who tends to imagine the worst possible case scenario, I choose four weeks and renew it for another four weeks when it matures. Let’s say our basement floods and needs immediate remediation — everything, from foundation repair to mold prevention.
Even if I’ve just renewed the T-bill, I know that the longest I’ll have to wait for it to mature is four weeks. In the meantime, I’ll use one of our rewards credit cards to pay for repairs.
Before the credit card hits the end of its billing cycle, chances are strong that the T-bill has matured. At that point, I have the option of not renewing. If I don’t renew, the Treasury Department will deposit the funds back into our bank account, and I can pay the credit card off in full.
Benefit No. 3
T-bill earnings help fight inflation. Stick with me here, because this bit can seem confusing. Once you understand how it works, though, you’re likely to find it brilliant.
Rather than pay interest, the government sells T-bills at a discounted rate but pays the full face amount upon maturity.
Let’s use my last T-bill order as an example. I placed an order directly through the Treasury Department website for a T-bill with a face value of $20,000.
Rather than $20,000, I paid $19,929.69. However, when the T-bill matures next week, it will be worth $20,000. That’s a little over $70 more than I paid. Prorated annually, that’s an interest rate of 4.52%.
The gain may not be enough to blow your hair back, but an extra $70 a month for doing nothing is unquestionably the right choice for me. And since I renew every four weeks, I prefer to think of the extra $840+ that a T-Bill will add to our savings account over the next 12 months (if interest rates stay the same).
Benefit No. 4
I don’t have to worry about losing principal, and I’m guaranteed a return. T-bills are safe because they’re backed by the full faith and credit of the U.S. government. They may not earn as much interest as other investments, but they are secure. And nothing is more important to me than security when it comes to our emergency savings account.
Benefit No. 5
There are no state or local taxes on interest earned. I don’t have to pay state or local income taxes on the interest earned from T-bills. I do have to pay federal income tax, but that’s okay because, again, it’s passive income.
I’ll be honest. I not only took my sweet time finding the right place to invest our emergency savings fund, but I’m slowly increasing the amount of money I move over to T-bills each month. There was no logical reason for me to wait, and if the past is any indication, I won’t ever regret making the move. I’ll only regret that it took me so long.
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