If you’re a saver, you’ve been punished for years with terrible interest rates on your savings account, CDs, or money market funds. Even short-term bond funds did not perform well recently.
Combine that with inflation which reached 8.5% in Marchthe largest year-over-year increase since 1981. At the same time, the S&P500 has fallen 14.2% so far this year (as of May 2).
This means that every dollar you save in a bank, credit union, mutual fund, or brokerage account loses value over time.
In this article, I’ll explain why buying U.S. Treasury bonds can be a great option for getting a better return than what you get with your bank or credit union while still being more liquid and taking less money. risks than with other options.
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Options to earn on the money you save
Saving for a house or a car? Want to spend a great family vacation in Europe in 18 months? Or do you plan to spend the money on something else in the next three to five years – and therefore have to refrain from investing, according to the advice of financial expert Clark Howard?
You have options. One of these options is to buy treasury bills, which I will discuss shortly. You can also put your money under the mattress. But so far this year, inflation is eating away at your purchasing power every day.
Here’s where you can put your money in the short term to at least earn Something.
Choice to store your money: Banking Options
- Savings account: At the start of this year, even the best high-yield savings accounts were paying just over 0.5% interest per year.
- Certificate of Deposit (CD): CDs are similar to savings accounts. But you agree to freeze your money with a bank for a period of time to secure a slightly better interest rate. The Federal Reserve has already started raising rates this year and is expected to continue to do so. Locking yourself into a CD might end up paying less than keeping the money in a savings account for the same amount of time.
Choices for storing your money: non-banking options
- Money market funds: Like treasury bills, money market funds are investments in short-term debt. But fund managers have had to eat fees in recent years. Otherwise, investors could have “earned a negative return” (losing money). In the first quarter of 2022, retail money market yields rose 0.03% while spending rose 0.22% on those same funds, according to the Wall Street Journal. As rates rise, expect fund companies to absorb some of the increases.
- Short-term bond fund: Clark advocated very short-term bonds as a good alternative to savings accounts in times of historically low interest rates. However, $10,000 invested in Vanguard’s ultra-short bond fund in the past 12 months would have lost $134.12. These bond funds can lose money in the short term when interest rates rise.
- Series I Savings Bond: You can at least stay even with Series I Savings Bonds. You can read our briefing on that here. But Series I bonds mature in 30 years. You must have owned them for at least a year. They are therefore not very liquid. However, you can earn 9.6% on these bonds for the next six months.
What is a US Treasury Bond?
If you’re holding cash in excess of your emergency fund (Clark says six months of spending is enough for most people), there’s another option: US Treasuries.
Want to earn a better rate on your money than you get from all other short-term and liquid options? You can buy U.S. Treasury Bonds directly from the federal government at treasurydirect.gov.
“U.S. Treasury securities…are considered one of the safest investments you can make, because all Treasury securities are backed by the full faith and credit of the U.S. government,” written FINRA.org.
The yield on three-month Treasury bills (treasury bills) rose 0.46% in the first quarter.
3 Types of U.S. Treasury Securities
There are three types of cash:
- Goods of treasure. These are short term. You can buy treasury bills that mature in days, four weeks, 13 weeks, 26 weeks, or 52 weeks.
- Cash notes. These are medium term. You can buy T-notes that mature in two, three, five, seven or 10 years.
- Treasury bonds. These are long term. You can buy bonds that mature in 10 to 30 years.
You can buy treasury bills
The government finances the US budget deficit by borrowing from other countries, large Wall Street corporations and wealthy individuals. However, most people don’t realize that you can help finance government budget deficits as a small saver and earn an interest rate similar to that of these big capital entities.
The government sells treasury bills through public auctions. Competing bidders specify the interest rate they wish to obtain, but their purchase order will only be accepted if the rate they wish is not higher than the resulting auction price.
Public money tends to involve ‘non-competitive’ bidding. You agree to the price determined by the auction. In return, you are guaranteed to get the amount you want. (The minimum purchase per auction is $100 and the maximum is $5 million.)
It is possible to buy a new Treasury bond each month. You can also automatically reinvest the proceeds as your treasury bills mature.
I’ll explain why buying US Treasuries can be a great option to earn a better rate than you get with your bank or credit union while still being more liquid and taking on less risk than you would. with other options.
How to buy treasury bills
Most people don’t realize this, but you can buy treasury bills yourself at treasurydirect.gov.
The first step is to open an account with TreasuryDirect. You will need to provide your social security number, address, bank account and routing number, and email address.
Then you will have to find auction dates. Non-competitive buyers can buy before the closing time on auction day, which is typically 11 a.m. ET for Treasuries.
“Buying treasury bills is so confusing for people and really only for someone who is willing to do the work of tracking rates and making a non-competitive bid,” Clark says.
If you want to buy treasury bills and hold them for more than 3-5 years, Clark says, you’ll be better served buying through a Vanguard cash fund or exchange traded fund (AND F).
You can also see rates the government has paid recently. This way you have a good rough estimate of what you will earn.
Final Thoughts
If you’re willing to navigate a somewhat complex and outdated government website, you can buy treasury bills. At least for now, treasury bills are probably superior to savings accounts, money market accounts, and very short-term bond funds.
Don’t expect to get rich – or even beat current inflation – by buying Treasury bonds. But they can help you get a slightly better return on your money in 2022 than your other options.
Questions about bonds or other money-related topics? Call the Team Clark Consumer Action Center toll-free and an experienced volunteer can help: 636-492-5275.
