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

Dan Rafter — Wed, 27 Jun 2018 08:30:16 +0000

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 TreasuryDirect.gov 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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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Rich You'd Be If You'd Invested $500 in FAANG 6 Years Ago

Damian Davila — Thu, 31 May 2018 09:00:19 +0000

Warren Buffett said it best: "Someone's sitting in the shade today because someone planted a tree a long time ago." One of those big trees in the investing world is FAANG, an acronym for five high-performing technology stocks: Facebook, Apple, Amazon, Netflix, and Google (now Alphabet, Inc.).

Let's find out how a cool $500 investment in FAANG would have fared over a six-year investment period.

2012: Off to a good start

Since Facebook held its initial public offering (IPO) on May 18, 2012, this date will be our starting point. And it's a great one because Facebook's IPO at that time was the largest technology IPO in U.S. history, raising more than $16 billion.

Let's imagine that you allocated exactly $100 to each one of the FAANG stocks. Assuming that you could buy fractions of shares, here's how many shares of FAANG you would have acquired back on May 18, 2012, rounded to the nearest hundredth. In this and all calculations throughout this article, we'll use the closing price.

Facebook: $100 @ $38.23 per share = 2.61 shares
Apple: $100 @ $75.77 per share = 1.32 shares
Amazon: $100 @ $213.85 per share = 0.47 shares
Netflix: $100 @ $9.99 = 10.01 shares
Google: $100 @ $300.50 = 0.33 shares

At the end of 2012, your initial $500 in FAANG would be worth $537, up 7.51 percent mainly due to a 32.43 percent jump in Netflix's stock price over the same period.

2013: Netflix leading the pack

You would have loved watching Netflix's stock price this year, as it went up 297.6 percent year-over-year, closing at $52.60. After 2012, Facebook traded sideways and didn't trade above its IPO price until July 31, 2013. But then it too ended 2013 strong with a 105.30 percent year-over-year increase in price. At the end of 2013, your FAANG portfolio would be worth $1,147.50, up 113.69 percent from the previous year.

2014: A year of stock splits and slow growth

On June 9, 2014, Apple issued its fourth stock split — this time, a seven-for-one stock split. This means that your 1.32 would have become 9.38 shares. Earlier that year on March 27, 2014, Google executed a 100 percent stock spinoff, which is similar to a two-for-one stock split.

All said and done, your portfolio's 2014 year-end value of $1,160.95 ended slightly above that of 2013 (a 1.17 percent year-over-year increase). What caused the small return? On December 31, 2014 the stock prices of Amazon, Netflix, and Google were down 22.18, 7.22, and 4.24 percent respectively from exactly the year before.

FAANG beats the S&P 500 over six years

Let's fast-forward a few years to May 18, 2018 and analyze the performance of our investment in FAANG against the most common stock market bench mark, the S&P 500.

Assuming that you were to hold onto your entire $500 FAANG portfolio from May 18, 2012 until May, 18, 2018, your portfolio would have been worth a cool $5,059.62, a whopping 911.92 percent return over the six-year period. If you had put the same $500 investment in the S&P 500 you would have ended with $1,047.30 at the end of the six-year period. That's a very decent 109.46 percent return over the same six-year period, but far below that of the FAANG portfolio.

Should you invest in FAANG?

If it ain't broke, why fix it, right? After all, the FAANG investing strategy continues to pay off in 2018. However, this doesn't mean that you should put your entire nest egg in FAANG. Here are three key caveats when considering an investment in FAANG.

Investment strategy fit

"Does FAANG match my investment strategy?" This is the biggest question that you should ask yourself before considering an investment in FAANG. If you're very close to retirement age, are very adverse to risk, or require a consistent stream of dividend payouts for income, then FAANG stocks may not be right for you. Make sure to first analyze FAANG from the perspective of your portfolio strategy.

Tolerance for volatility

As FAANG companies continue to push the boundaries of technology, the stock market continues to reward their valuation. However, sometimes the pendulum swings in the other direction. Remember the Facebook CEO's testimony before Congress on April 10, 2018 due to privacy concerns? The price of one Facebook share went from a high of $185.09 on March 16, 2018 to $165.04 on April 10, 2018. Could you have stomached a 10.83 percent loss over a 25-day period?

Overexposure to FAANG

If you hold an S&P 500 index fund, you're already exposed to FAANG. Let's assume that you hold the Vanguard 500 Index Fund Investor Shares. By owning one share of this Vanguard index fund, your portfolio has an allocation of 3.7 percent to Apple, 2.8 percent to Amazon, 2.7 percent to Google, and 1.80 percent to Facebook.

And that's before taking account any other investments you might hold. If you also have another index fund in the technology sector, you probably have an even greater holding of each one of those investments. For example, the Vanguard Information Technology Index Fund Admiral Shares [Nasdaq: VITAX] has Apple, Amazon, and Google among its top four largest holdings.

There are many mutual funds out there that already include Apple, Facebook, Amazon, Google, or Netflix among their holdings. Make sure to consider how much your existing portfolio already has allocated to FAANG before you add even more shares of these high-growth stocks.

How can you invest in FAANG without breaking the bank

With individual shares of Amazon and Google trading at $1,574.37 and $1,066.36, respectively on May 18, 2018, it is impossible to make the same original investment of $500 to buy all five of the individual stocks that make up FAANG as we did in this experiment.

Still, there is a simple way to start investing in FAANG: exchange-traded funds (ETFs). Similar to an index fund, an ETF tracks an asset or basket of assets. Unlike an index fund, an ETF can be traded several times throughout the day and doesn't require a minimum investment.

There are three key reasons why ETFs make investing in FAANG more approachable for the average investor.

The expense ratio (the percentage of assets deducted each fiscal year for fund expenses) for ETFs is generally lower than that for funds tracking the same type of investment. For example, the Vanguard Growth ETF has a 0.05 percent annual expense ratio, while the average annual expense ratio of similar growth funds is 1.10 percent.
Some brokerage houses charge no trading fees when you stick to in-house ETFs. For example, users of the Vanguard Brokerage Account can trade without fees as long as they buy Vanguard ETFs.
There is no minimum investment, so you could buy as little as one share of an ETF. Generally, prices for one share of FAANG ETFs range from $10 to a few hundred dollars. This prevents you from putting all your eggs in one basket. Remember that historical returns (even as great as those from FAANG) are no guarantee of future returns. So, you still should diversify your portfolio.

Here's a list of FAANG ETFs to get you started on your research, but make sure to look at other lists as well. Buyer beware: By definition, a FAANG ETF is one that offers an investor at least 1 percent exposure to FAANG stocks. While diversification is great, select an ETF that best matches your target exposure to these five high-growth technology stocks.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Many Happy Returns: 5 Tips for Getting What You Really Want This Holiday

Linsey Knerl — Wed, 26 Dec 2007 04:36:32 +0000

Even the most appreciative of recipients get something they really can’t use. Whether it was an article of clothing in the wrong size, a tasteless item of décor, or a foodstuff that you’re allergic to, a touching sentiment can sometimes be more trouble than it’s worth. If you have your heart set on returning your holiday gift for something more suitable, following these five simple tips can make it a bearable experience.

Don’t open it! Unless a restocking fee of up to 20% sounds like a good idea, keep that box sealed in its original factory condition, if possible. While it may not always be possible to tell if you will be keeping your gift until after you open it, many electronics, appliances, and collectibles loose value after their seal has been broken. (The same rule goes for excessively shaking, poking, or bending items.)

Go early. Don’t mess around with returning your gift item. If you’re certain it won’t work out, get back to the store ASAP. Find out what time the store opens and get there as early in the morning as possible. Lines start forming in the customer service areas of many big box stores within hours after opening. By taking your enthusiasm for a new gift and putting it towards an early morning return trip, you can avoid hassles and look forward to more time with the right gift!

Bring a receipt. This might seem like a no-brainer, but it surprises me how many people have a receipt, yet fail to bring it. While many stores will do a limited number of returns for people without receipts, they are getting strict with their policies. In an attempt to recoup some losses and avoid fraudulent returns, some stores may only accept 2-3 returns without a receipt from each person per calendar year. Many stores will generate copies of receipts for customers using their driver’s license or the credit card used to make the purchase.

Take a breath. Many people will be trying to return their gifts the week after the holidays, so try to relax a bit. Long lines, snappy customers, tired employees, and a general mood of confusion may meet you at the customer service department. Remember why you’re there, keep focused, and don’t contribute to the problems by being unpleasant in any way.

Be responsible. Enter the store knowing what you will do once you have returned your gift. If you’re just exchanging for a like item, you’re all set! Exit the store as soon as possible to avoid any impulse shopping of more stuff you don’t need. If you are getting cash for your return, know in advance what it will be used for, and stick to your list! The after-Christmas sales can be tempting, and stores are hoping you will spend that money in the store before you leave. If you are planning on buying something else with the money, don’t feel like you have to get it that same day. Prices may drop even lower as the weeks pass after the holidays, and comparison shopping is best done when you aren’t tired and frustrated from the return process.

Sadly, a recent poll by Inside Indiana Business reports that 13 percent of consumers want to return items, but feel that it is too much of a hassle. If you are confident that your perfect gift is out there, take these steps to ensure that you can have it, with minimal effort and aggravation!

This article is from Linsey Knerl of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The false goal of maximizing investment returns

Philip Brewer — Thu, 16 Aug 2007 11:15:48 +0000

Along about the middle of the dot-com boom--when the market had already had two years of 20% annual gains--I read an article that suggested that individual investors had no need of a cash reserve, because they could use credit cards in an emergency.

As I explained in my article about the credit squeeze , I think keeping a cash reserve is especially important right now, but I mention this article because I think it highlights a fundamental distinction in the way people think about investment returns.

Maximum investment returns

The article had a whole investment program, suggesting that you dispense with a cash reserve and instead invest 90% of your money in an S&P 500 stock fund and 10% of your money in zero-coupon bonds with a maturity date the same as your planned retirement date. When it was time to retire, you'd have three year's spending in zero-coupon bonds, plus about ten times that in stocks. The plan was to move the newly matured zero-coupon bonds into cash and use that money for day-to-day spending in retirement. Each year you were supposed to check the stock market performance and sell enough stocks to top off your cash account with enough to support three years spending--unless the market was down that year, in which case you waited a year and did the calculation again. Only if the market were down three years in a row would you need to sell stocks in a down year.

If you had a financial emergency before retirement, you just charged it on your credit card. You could then pay the debt off from current income. If current income wouldn't cover it, you could sell stock to cover it--but you could do it at a time of your own choosing.

People with a reasonably secure job in a reasonably secure industry could probably take the risk of having no cash reserve, and they'd probably come out ahead over a thirty year career by putting 90% of their money in stocks.

Supporting your goals

I think that plan is a bad one. The reason is not that it doesn't maximize returns--it probably does. The reason is that the goal of an investment portfolio is not to maximize returns. The goal of an investment portfolio is to support the investor's life goals. An investment portfolio has done its job if it:

provides the capital to make major purchases along the way (a car, a house, tuition),
provides a financial cushion against the vicissitudes of life, and
lets the investor retire at a suitable standard of living,

all without taking income that's needed to support daily living.

Extra return over that is not a win if its cost is a level of risk that endangers the investor's financial plan rather than supporting it.

Have a life plan. Evaluate your investment portfolio for whether it supports that plan. Be suspicious if your plan is criticized for "not maximizing returns." The goal isn't maximum returns. The goal is returns that support your plan.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Track Your Refunds or Get Ripped Off

Andrea Karim — Tue, 06 Mar 2007 19:41:59 +0000

“Refunds” are supposedly different from “rebates”, although honestly, you might never know it, since both are difficult to obtain. I find that lately, I’ve had to harass the heck out of companies, particularly companies that primarily do business via mail order or on the internet, to get my money back even after returning a product.

In the past, when I treated money with a devil-may-care attitude, I’m sure I let dozens of potential refunds slip right by. I don’t believe that all retailers really want to rip off customers, but I don’t see refunds as a really high priority of theirs, either.

A few months ago, I realized that I had not received a refund for an anti-virus program that I had purchased months before, the installation of which had required a hard drive reformatting. Thinking that I was being taken for a ride, I emailed the company and demanded my money back. An apology was issued, along with an immediate refund.

It was after that experience that I started to keep track of expected refunds. Any time I returned an item to a non-local retailer, I noted the expected time frame for a refund, say 6 weeks, and then entered a reminder in my cell phone that would go off roughly 6 weeks later. When the reminder popped up, I’d check my account balance and see if the refund had been issued. I found that if I didn't do this, it was really easy to forget that I was owed money.

I returned quite a few items following this holiday season, so I was expecting at least six refunds. Guess how many came through in the “expected” time frame?

Yup. Zero. Not one. For every single refund, I had to email and/or call the company and ask for the refund. Almost all of them refunded my money within 24 hours, with the exception of Palmer Cash, the “vintage” t-shirt people who don’t seem to believe in customer service.

Which got me to thinking: after your returned merchadise is received, these companies are perfectly capable of processing your refund the same day, but they don’t. They tell you it might take 4-6 weeks. Are they expecting you to forget or get lazy about it, the same way companies that offer rebates try to make it as difficult as possible to get your money back?

My advice to people who don’t track their expenses as well as the budgeting types:

Whenever you return an item, set up and automated reminder (be it on your cell phone, email, online calendar, or regular ol’ wall calendar) so you’ll remember to look for the refund towards the end of the expected processing time. If I hadn't been tracking these expected refunds, I'd probably be out well over $400 right now.
As always, pay with a credit card if you have one. I don’t, so I use my debit card, which doesn’t offer protection like major credit cards. Mind you, I rarely buy big ticket items.

This article is from Andrea Karim of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: