How to Use T-bills to Safely Boost Your Emergency Fund


You know you need an emergency fund filled with six to 12 months' worth of daily living expenses. You also know that you need to keep this fund in a safe place that gives you easy access to your money.

The problem? Traditional savings accounts — the most obvious place to stash emergency fund dollars — pay so little interest. Your money will sit in a savings account safely, but it won't earn you anything, either. This is where T-bills, or Treasury bills, can help.

T-bills are short-term investment vehicles backed by the Treasury Department of the U.S. government. They're safe, they generate greater returns than traditional saving accounts, and because they are short-term investments, you can get at your money quickly.

As a result, T-bills can be an excellent way to boost the money in your emergency fund. (See also: How to Earn Money With Your Emergency Fund)

The basics of Treasury bills

T-bills are provided by the Treasury Department and are offered in short terms ranging from a few days to a maximum of 52 weeks. If you invest in a four-week T-bill, you'll gain access to that money after 28 days. This is good for an emergency fund: You never want your emergency fund dollars tied up in long-term investments that you can't access quickly.

You can buy T-bills by logging onto or by working with a bank or broker. You make money by buying T-bills at less than face or "par" value. You might, for instance, buy a 13-week T-bill with a face value of $1,000 for $995.20. After the bill matures in 13 weeks, you'd get back $1,000. You'll have made $4.80 in 13 weeks, which is an annual interest rate of 1.9 percent (the rate as of June 20, 2018). It doesn't seem like a lot, but try getting that from your bank.

You don't have to spend a fortune to invest in T-bills. TreasuryDirect sells T-bills in denominations of just $100. Of course, you'll generally see greater returns by making larger investments. But T-bills do provide a way for people with lesser amounts of cash to invest in a safe, government-backed investment vehicle.

An important thing to note is that you will have to consider the interest you earn from T-bills as income. This income is subject to federal income tax. You won't, however, have to pay state or local income tax on this income.

Buying T-bills

You can buy T-bills through TreasuryDirect in four-week, 13-week, 26-week, or 52-week terms. You can also buy cash-management bills that come with even shorter terms of often just a few days.

T-bills are sold at auction, and you can either place a noncompetitive or competitive bid. All T-bills, except 52-week versions and cash-management bills, are auctioned every week. It is here that the discount rate is determined for each bill.

The 52-week T-bill is auctioned every four weeks, while cash-management bills are not auctioned on a regular schedule. You'll have to check TreasuryDirect to determine when these bills are up for auction.

With a noncompetitive bid, you accept the rate for your T-bills that has already been determined at auction. You can submit a noncompetitive bid on your own, and you are guaranteed to receive the bill you want.

Banks, brokers, or larger investors typically submit competitive bids since it's a more complicated process. Competitive bids might be rejected if the rate you choose is higher than the discount rate set at the auction.

Why T-bills are good for emergency funds

T-bills work well as a way to boost your emergency fund because of their combination of being safe and having short terms. They are backed by the federal government, so your money will be protected.

They also come with a guaranteed return of at least your principal investment. When you invest in a T-bill, you know exactly what you are going to get back. If you're building an emergency fund, that's a critical benefit.

To keep your emergency fund easy to access, don't invest all of it in a short term T-bill — leave enough in regular savings to cover the likeliest emergencies. If you invest in four week T-bills, the rest of your emergency is never more than 28 days away. You'll have to decide the right mix for you.

From an investment standpoint, you'd earn a higher return investing in the stock market — but the stock market comes with risk, which is detrimental to an emergency fund. Sure, you might make more money, but you might lose more, too. You don't want to take risks like that with money you need in case of a financial emergency.

Certificates of deposit are another relatively safe investment, but still not a great place to stash emergency fund dollars. They usually come with longer terms, with the most valuable CDs requiring you to keep your money in them for a year or more. With T-bills, you can invest for the short-term — as little as four weeks.

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