If you're a beginner investor looking for a strategy to combat inflation and generate income through fixed-income investments, building a Treasury bill ladder (T-bill ladder) might be the solution you're seeking. In this article, we'll explore the benefits of T-bill ladders, their potential for income generation, how they compare to other investments, and more.
What is a T-bill ladder and why should you consider building one? A T-bill ladder is a strategy where you invest in Treasury bills with different maturity lengths, typically ranging from 4 to 52 weeks. As the bills with the shortest timelines mature, you roll them over into longer timelines. The objective is to take advantage of rising interest rates over time, assuming that the U.S. government will increase rates to combat inflation. By earning interest on your short-term Treasury bills now and potentially capturing higher rates in the future, you can safeguard your investment against inflation.
T-bills are considered low-risk, government-backed securities, making them a reliable hedge against inflation. As the government takes measures to fight inflation, it often creates a more favorable interest rate environment. By diversifying beyond the stock market and investing in Treasury securities like T-bills, you can potentially earn higher returns and protect your funds from devaluation. Building a Treasury bill ladder is a valuable tactic to navigate these opportunities.
So, how can you make money with a Treasury bill ladder? Treasury bill interest rates fluctuate, but they have been trending upwards recently. By investing in T-bills through platforms like Public.com, you can lock in an interest rate of 5.4%*, which is higher than many other short-term investment options as of 5/25/23. Investors can use T-bill ladders to purchase discounted T-bills with varying maturities. When the bills reach maturity, you receive the face value of the bill, which can be reinvested or used to meet your short-term investment goals. This strategy also provides extended liquidity, enhancing your earnings over time.
Now, let's explore how to build your own Treasury bill ladder. Here's an example for illustrative purposes, but remember to adjust the maturity terms based on your preferences while following the same general pattern:
Example:
Theresa decides to purchase three sets of T-bills, each worth $100, with different maturity terms of 4, 8, and 13 weeks. These sets represent the "rungs" on Theresa's ladder.
When the 4-week T-bills mature, Theresa rolls over the invested amount (including accrued interest) into a new set of 13-week T-bills.
When the 8-week T-bills mature, Theresa repeats the process and rolls over the funds into a new set of 13-week T-bills.
At this point, Theresa has three sets of 13-week T-bills, with maturation occurring every 4-5 weeks. By continually rolling over the T-bills into new sets, Theresa collects interest approximately every month and compounds her earnings. This approach ensures a short-term savings plan and a reliable cash flow.
To buy T-bills, follow these simple steps on Public.com:
- Move your cash to the Public brokerage app by linking a bank account or making a deposit with your debit card.
- Create your Treasury Account, which allows you to purchase and manage your Treasury bills from a single account.
- Purchase U.S. T-bills through your Public account and lock in your rate.
In conclusion, T-bills are already recognized as a reliable investment strategy to protect your funds during times of high inflation and market volatility.