Unless you put your cash in a long-term CD or with a select group of banks like CIT Bank where you can earn 2.4% on deposits, banks are not the best place to keep all your cash.
Most banks don’t even give you a tenth of a percent in interest for the pleasure of holding your money and charging you a fee to maintain the deposit and withdraw it from an ATM.
That’s why you should circumvent the banking system and hold a good chunk of your cash in US Government Treasury Bills.
That’s right. US Government Treasury Bills (or T-bills).
T-bills are a good choice
Before you think I lost my mind, let me explain.
For starters, I would NEVER put my money into long-term bonds in a massively indebted country like the US. People who buy 30-year US government bonds are nuts. There’s no way the government is ever going to pay all the debt it owes back.
It’s hard to imagine what the country is going to look like next YEAR, let alone 30 years from now.
But just because buying US long-term debt is too risky doesn’t mean that all its bonds are bad. There is short-term debt that makes perfect sense right now – the shortest duration bonds (T-bills) are just 28 days.
Why you should invest in T-bills
No matter how you feel about the US government or even Donald Trump, it’s a pretty safe bet that T-bills are not going to default in the next four weeks.
While other people risk their money buying stocks at record high prices, or hold their money in a risky bank for a 0.02% interest rate, 28-day T-bills pay an annualized return of 2.4%.
Another reason I like T-bills is that the interest earned is exempt from state and local income taxes.
Investing in T-bills is easy
The best way to buy 28-day T-Bills is to open an account at Treasury Direct, which you can do here.
All you’ll need is a US Social Security Number and a US bank account. It’s a remarkably simple process.
The US Treasury Department holds an auction to sell 28-day T-bills once a week.
So, when you want to purchase, create an account or just log if you already have one, click a few buttons to indicate how much you want to buy, and the Treasury Department will automatically debit the money directly from your bank account to buy the T-bill.
Before the 28 days expires, you can choose to automatically roll over the amount you invested four weeks later into a new T-bill. Or you can choose to have the proceeds deposited directly into your bank account.
Here’s how to ladder treasury bills
One very easy way to do it is to split your savings into fourths using a technique called laddering.
Laddering is a method of purchasing that increases the liquidity of fixed-term investments such as Treasury Bills. Here how laddering works.
Let’s say you want to park $100,000 into 28-day T-bills.
You’d buy $25,000 worth on January 1st, then another $25,000 on January 8th, then another $25,000 on January 15th, and another $25,000 on January 21st.
Then, the following week, on January 28th, the original $25,000 T-bill that you purchased on January 1st will mature, and you could roll that over for another 28-days.
Or if you find you need the money, you could choose to redirect the funds back to your bank account.
This is an easy approach that could literally earn you 100x more interest than what your bank is paying you, without all the extra fees.
TreasuryDirect now has a minimum purchase amount of $100, allowed in increments of $100. This means you would need to commit 4 x $100 = $400 to create a weekly ladder.
Other brokerage firms may impose a higher $1,000 minimum per T-Bill. If you don’t have enough, you can simply buy them at less frequent intervals.
Final thoughts
As unbelievable as it may sound, the US Treasury Department is a better place to park cash than the banking system, but at least for now, that’s the reality.