You deposit your hard-earned money into the bank, but do you ever wonder where it goes, how it’s used, or why your bank is paying you so little in interest, especially when current interest rates are at a 22-year high?
Here’s the deal—banks love to make money on your money, but they don’t love to share it.
Banks earn money on your deposits in a couple of ways. First, through the interest they charge when loaning your money out, which is higher than the interest they pay to you. In addition, banks may invest your money in low-risk assets like Treasury Bills, earning a satisfactory return. The difference between the interest earned and paid, along with other income sources, helps cover expenses and generate profits for the bank.
But instead of letting banks profit off your savings, why not maximize your own savings by exploring options like Treasury Bills?
What is a Treasury Bill?
Treasury Bills or, “T-Bills” are short-term debt instruments issued by the U.S. Treasury Department, with maturities of one year or less.
They are backed by the full faith and credit of the U.S. government, making them very low-risk. In exchange for lending money to the government, investors earn interest on their investment when the T-Bills mature.
Unlike traditional savings accounts or certificates of deposit (CDs), T-Bills can offer higher interest rates and are exempt from state and local taxes. They are also highly liquid, meaning they can be easily bought and sold on the secondary market before their maturity date. This flexibility allows investors to potentially earn a higher return on their savings while still having access to their funds when needed.
The Downside of Traditional Savings Accounts
While traditional savings accounts may seem like a good option for your excess cash, they have some clear downsides to consider.
- Low Interest Rates: Despite current interest rates being at multi-decade-long highs, the average interest rate for a savings account is just 0.45% APY. While you might feel secure having your money in a traditional savings account, the reality is that the returns are meager, typically not even keeping up with the inflation rate.
- Inflation’s Impact: Consistent inflation can erode the real value of your savings. If the interest rate on your savings doesn’t keep pace with inflation, your money loses purchasing power. This means that over time, the same amount of money will buy less. Ignoring the impact of inflation is a big mistake when it comes to planning for the future.
- Bank Fees: Many traditional savings accounts have bank fees that can erode your savings, undermining the account’s benefits. Want to sell a CD early? Banks may say, “Pay a penalty.” Other fees include monthly maintenance fees, minimum balance fees, ATM fees, and other charges. Some banks waive these fees if certain conditions are met, like maintaining a minimum balance or setting up direct deposit. Failing to meet these conditions can result in significant charges, quickly negating any interest earned and reducing long-term savings.
The Untapped Potential of Brokerage Accounts and Treasury Bills
Alternatively, if you decide that you want to access higher rates of return, there are other options available to you. These include using a brokerage account to buy Treasury Bills (T-Bills), which offer a potentially higher yield compared to traditional savings accounts. Some of the benefits to consider are:
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Higher Interest Rates
Interest rates on T-Bills vary depending on the maturity, but they can potentially offer higher rates than traditional savings accounts. For example, at the time of writing, a 6-month T-Bill is currently yielding 5.33%, while a 1-year T-Bill is yielding 5.38%. Compared to the average of 0.45% APY that a traditional savings account pays, this is a significant difference.
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Tax Benefits
One of the great advantages of Treasury bills is that the interest you earn from T-Bills is exempt from state and local taxes. This means a greater portion of your earnings stays in your pocket, further enhancing your savings potential.
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Low-Risk
Concerned about risk? Treasury bills are backed by the full faith and credit of the U.S. government, making them one of the lowest-risk investments available.
Liquidity
Treasury bills offer excellent liquidity. Need to access your funds before maturity? No problem. You can easily sell your T-Bills to other investors without commission or penalty, giving you incredible flexibility.
In conclusion, Treasury Bills offer an attractive investment opportunity with higher interest rates, tax benefits, low risk, and liquidity. They can yield significantly more than traditional savings accounts, and the interest earned is exempt from state and local taxes. Backed by the U.S. government, they are among the safest investment options. Lastly, they provide impressive liquidity, allowing you to sell before the maturity date.
Making the Switch: A Step-by-Step Guide
Interested in making the switch from a traditional savings account to a brokerage account with T-Bills? Here’s a step-by-step guide to consider:
Step 1: Open a Brokerage Account
To buy Treasury bills, you’ll first need a brokerage account. When choosing a custodian, consider factors like fees, platform ease-of-use, and customer reviews. Example custodians are Charles Schwab, Fidelity, Vanguard, or Interactive Brokers.
Step 2: Identify and Buy a Treasury Bill
To identify the right T-Bills for you:
- Determine your investment horizon: T-Bills have maturities of one year or less.
- Analyze the yield: Higher yields typically correlate with longer maturities.
- Use your brokerage platform to view available T-Bills and make your selection.
How to buy:
- Log into your brokerage account.
- Navigate to the Treasury Bills.
- Select your desired T-Bill and specify the amount.
- Confirm your purchase.
Buying a Treasury bill ETF (The Easy Option!)
If you’re looking for even more convenience, consider using T-Bill ETFs. These funds can have some key benefits over individual T-Bills:
Compared to individual T-Bills, T-Bill ETFs offer:
- Diversification: They can hold a range of T-Bills with different maturities.
- Convenience: No need to repurchase at maturity, as ETFs self-manage.
- Liquidity: Easily traded on stock exchanges.
- Accessibility: Suitable for smaller investments.
- Cost Efficiency: Potentially lower transaction costs over time.
- Easy reinvesting: Interest income in the form of dividends can be automatically reinvested, compounding returns.
Examples of Treasury bill ETFs include SGOV, BIL, or SCHO.
The Bottom Line
When it comes to your money, knowledge is power.
Traditional bank accounts may feel familiar, but they might not be the best place to hold excess cash. By considering alternatives like individual Treasury bills or T-Bill ETFs, you can potentially earn higher returns, enjoy tax benefits, and ensure your savings are both safe and liquid. As you plan for a secure retirement, remember to explore all your options and make informed decisions that truly maximize your savings potential.
