How To Build A Treasury Bill Ladder: A Visual Guide

So you’re interested in buying some Treasury Bills for the potentially higher returns, but aren’t exactly sure how to set it up. Well, this guide is for you! I’ve been laddering T-Bills for over a year now in order to maximize the profit out of my existing house downpayment savings and also my no fee 0% balance transfers.

Quick Facts

  1. Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
  2. Rates are set by auction, so you will not know your exact interest rate before you commit to buy. However, if you are in a high income-tax state the chances are very good that it will be better than similar savings accounts.
  3. Auctions are held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
  4. You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
  5. The transfer of money to/from your bank account upon purchase/maturity is very timely. Thus, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account will have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

Since each T-Bill has an investment minimum of $1,000, you would need to commit 4 x $1,000 = $4,000. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying them every month, every two weeks, and every week:

$1,000 Minimum – Buy a T-Bill Every Month
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)

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In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

$2,000 Minimum – Buy a T-Bill Every Other Week (Bi-Weekly)
Week #1: T-Bill #1 issued on Thursday (net: -$995)
Week #3: T-Bill #2 issued on Thursday (-$1990)
Week #5: T-Bill #1 matures, T-Bill #3 issued on Thursday (-$1985)
Week #7: T-Bill #2 matures, T-Bill #4 issued on Thursday (-$1980)
Week #9: T-Bill #3 matures, T-Bill #5 issued on Thursday (-$1975)
(and so on…)

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As you can see, you should never need more than $2,000 committed to T-Bills using a bi-weekly ladder. If you have $2,000, this would be a better way to set up your investments since in the worst case you can stop buying new T-Bills and get access to half your investment in 14 days once the ladder is constructed.

$4,000 Minimum – Buy a T-Bill Every Week
Week #1: T-Bill #1 issued on Thursday (net: -$995)
Week #2: T-Bill #2 issued on Thursday (-$1990)
Week #3: T-Bill #3 issued on Thursday (-$2985)
Week #4: T-Bill #4 issued on Thursday (-$3980)
Week #5: T-Bill #1 matures, T-Bill #5 issued on Thursday (-$3975)
Week #6: T-Bill #2 matures, T-Bill #6 issued on Thursday (-$3970)
Week #7: T-Bill #3 matures, T-Bill #7 issued on Thursday (-$3965)
(and so on…)

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Here, you’ll never have more than $4,000 committed, and 1/4th of you money will be available in a week once the ladder is constructed.

Practical Details
The easiest way to buy T-Bills is online at TreasuryDirect.gov. Check out the TreasuryDirect Guided Tour for a walkthrough; It’s very similar to opening an online bank account. There is no hard credit check. You can easily link an existing online savings account, if you wish.

After logging in, do not use “Purchase Express”, click on the “Buy Direct” tab on top instead, and choose “Bills”. Here is a screenshot of the entire purchase screen, and below are some excerpts.

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If you choose your interval with repeating purchases, everything pretty much goes on autopilot. Note that I chose both the source and destination of funds to be my bank account (5% WaMu savings). Be careful about the 6-withdrawal limitation of savings accounts.

If you want to avoid the extra transactions at the expense of a little bit of interest, you may choose to use the “Certificate of Indebtedness” as your source or destination account. Just think of it as a savings account that pays no interest that serves as a holding place for money. Obviously, you don’t want to keep too much in there.

Whew! I hope that actually helped instead of just adding to the confusion.

Comments

  1. When you are buying bills weekly, do you need $4000 or $5000?

    For example, on week 5, your bill from week 1 is maturing and you will be buying a bill for week 5. Can the funds from the sale of that first bill be in your account fast enough to buy the next bill that same week? Or are you going to have an extra $1000 that is not invested in bills for a week?

  2. To avoid the dreaded 6 withdrawal/month issue you can also use the Treasury’s ‘C of I’ holding account. You don’t get interest on this ‘account’ but it very easy and quick to move any interest to one of your savings accounts. I have treasury ladders and after the first funding of a bill from a checking/savings account, just use the ‘C of I’ account to fund the next week’s purchase. All deposits and withdrawals occur on a Thursday so you can fund a new purchase with the funds from one reaching maturity via the ‘C of I’ account. You then just need to remember to sweep the interest into a savings account.

  3. Typo above…

    “$2,000 Minimum – Buy a T-Bill Every Other Month (Bi-Weekly)”

    should read

    “$2,000 Minimum – Buy a T-Bill Every Other Week (Bi-Weekly)”

    :-)

  4. For places like Emigrant Direct and ING Direct, it is easy to open up several different accounts under one customer. (I don’t know if WaMu is the same way or not.)

    Does anyone know if it is six withdrawals per customer per month, or is it six withdrawals per each account per month? If it is per account, you could set up a separate account to hold just T-bill funds with up to 6 transfers per month. Need more? Just open another account.

    Maybe it’s more hassle than it’s worth to keep track of different account numbers and make sure everything comes out of the right place, but it seems like an easy way to make sure you get the most for your money and not make the banks mad.

  5. Wisely Sunshine says:

    I just wonder how much do you make so far with the T-bill? Thank again for always has a great tip!

  6. Johnathan,

    Thanks for the awesome tutorial. I knew in theory how it worked, but the practical aspects of setting up the account via TreasuryDirect are perfect.

    Quick question. I know the rates change, but can you give a ball-park of the types of interest you can expect from this process? For example, most of the MMF and MMA yields are around 5% or so now, what type of rate are you getting with the T-Bills this month?

    Finally, I just recently opened a Vanguard Prime Money Market Fund, and it has checking writing privileges for checks > $250. Anyone know if setting up an automated process like the above would work with this type of account?

    Thanks again!

  7. Thanks for the info! This explanation would have been very helpful a year ago :)
    Because of your blog, I started putting my long-term savings into T-Bills, and it’s great to actually get a decent return.

    Thanks for all your information you put out there!

  8. so much hard work to save the small percentage of state taxes (which i actually forgot to do when I filed) you still need to pay atleast 1/4 (I hope that you are in the 25% bracket) of the interest to the gov.

    you probably will be much better off investing in one of Vanguard’s funds (although I would recommend a diversified stock profile in Zecco.com), get around 10 percent with no need for counting pennies or other bs… and when you make so much you don’t have to be cheap and you could give some to your state :) maybe they will build a nice park out of it.

    its funny how the shorter term investments end up yielding more in interest then longer ones…
    28-DAY 03-15-2007 04-12-2007 5.160 5.267 99.598667
    91-DAY 03-15-2007 06-14-2007 4.965 5.112 98.744958
    182-DAY 03-15-2007 09-13-2007 4.920 5.130 97.512667

    Ace
    let me know what you think, cohenas@hotmail.com

  9. How does the Certificate of Indebtedness work? Judging by the Treasury Direct description, it sounds like the CoI would be useful for creating a T-Bill ladder. But if I use the $1000 from the maturing bill to buy the new bill at $995, where does the extra $5 go? I’ll dig around the site a little more and try to find out, but I thought you might know.

  10. hayhehes says:

    Seems like this would be a preferable vessel for 0% APR balance transfers no? And here mine has just been sitting in a savings account earning a measly 5.05% APY (before state and federal taxes).

  11. Bill Baron says:

    Thanks for your excellent explanation. I’m trying to figure out if a ladder is worth the modest hassle, as compared to the convenience of something like Vanguard’s Prime Money Market fund. The problem, of course, is finding a way to compare the investment return. Vanguard reports that the Prime MM fund has a “seven day average income yield net of expenses” of 5.09%. The Treasury reports that the most recent 28-day T-Bill “investment rate” is 5.267%. Are these rates reasonably comparable?

  12. For the $2,000 minimum I think you mean “Buy a T-bill every other week” not month.

  13. Bill Baron says:

    Re James’ question about using a Vanguard Prime Money Market account. I just called Vanguard and asked. Because the Prime MM is not a real bank account, it doesn’t have an ACH number and cannot be linked to Treasury Direct. But you could set up a ladder using Vanguard’s Brokerage Services to buy the T-Bills, in which case you it would be linked to your Vanguard Prime MM account. But then there are two issues: One is commissions, but they are zero if you are a Vanguard Flagship customer. The other issue is that you cannot set up automatic reinvestments on Vanguard’s brokerage service. You’d have to remember to schedule the reinvestment each week.

  14. “For example, on week 5, your bill from week 1 is maturing and you will be buying a bill for week 5. Can the funds from the sale of that first bill be in your account fast enough to buy the next bill that same week? Or are you going to have an extra $1000 that is not invested in bills for a week?”

    Steve – Yes, it is always “fast enough”. The maturing T-Bill always gets deposited into your account the very first thing on Thursday morning. Then, any withdrawals from purchasing another T-Bill are taken out. It works very smoothly, like clockwork.

    mc – thanks for adding that, I also added some info about the Certificate of Indebtedness to the main post. The whole “clockwork” thing works well with the CofI too. You could just deposit $4,000 into the CofI and start a weekly ladder.

    Typo fixed :)

    Chris – I think this is possible, although I also read that if you open account specifically to circumvent the rule and they find out, they can shut down your other accounts.

    Wisely – I don’t know exactly, I’ve switched back and forth between 6-month T-Bills and 28-day bills as I watch the rates. I’m usually making about 1% APY than a comparable bank, so a few hundred dollars?

    James – T-Bills are best for those with high local income taxes, see here for a brief explanation. Not sure about the VG MM fund.

    Ace – 10% with no risk for short-term goals would be a great feat, shoot me over the ticker symbol :)

    Michael – The $5 just sits there earning no interest until you manually sweep it back into your bank account.

    Bill – Not exactly comparable. I’ll try to explain in a new comment when I have another 15 minutes free.

  15. note*
    by vanguard I ment their star fund (not MM)… its suppose to be a steady growth account, so you wont see much fluctuations day by day.

    1 Year 3 Year 5 Year 10 Year Since Inception
    STAR Fund 11.64% 10.21% 8.16% 9.19% 11.12%

    I agree that you do not get as safe and secure return, after all its based on the stock market, but look at these statistics… average returns for the past 10 years has been 9.2%

  16. wesleman says:

    I believe the purpose of a T-bill ladder is as a comparable alternative to putting one’s emergency funds in a high-yield FDIC-insured savings account, i.e., conversatively invested and fairly liquid. I personally own the Vanguard STAR fund as well but not with my emergency funds.

  17. While being a government agency, its 1099 format is non-standard and confusing. There’s no box number on the 1099. I suppose the T-bill interest belongs to box3 (am I right?). It’s totally up to the tax payer to interpret the numbers properly.

  18. “You can easily link an existing online savings account, if you wish.”

    How?

    I know that the ELoan online savings account only allows you to withdraw funds to your linked checking account. So, the money would need to be moved to the checking account first then TreasuryDirect would deduct from there.

    My question is: What online savings account allows withdraws using more than just checking? In other words, where can I find an account that would allow me to have TreasuryDirect withdraw funds from it?

    Thanks!

  19. E-Loan is more strict than most online banks. Out of this list on online banks:

    Linkable: Washington Mutual, Citibank, Emigrant Direct (it worked for me), HSBC Direct

    Probably not: E-Loan, ING Direct

  20. Thanks Jonathan!

  21. Seems to me that Emigrant Direct will not work. I have two linked checking accounts already. Is that maybe the issue? I get this code from Treasury Direct “R20 – Non-Transaction Account”. Anyone else have this issue? I see that Jonathan, you said it worked for you, am I doing something different? Its not like there is a Treasury Direct routing number to use that I can link from the ED side, correct?

  22. Hi Randy,

    Thanks for sharing your experiences. I have linked and used with Emigrant, but this was at least several months ago. I have not done it recently.

    Emigrant may be cracking down on transfers to/from non-linked accounts like ING Direct and E-Loan. The reason given is always “security”.

    I would add Emigrant to the Probably Not list, then. Bummer.

  23. What rate of return does this scheme deliver? Roughly speaking and what are the generally accepted advantages? It wasn’t completely clear from this article.

  24. The rate of return depends on what state and local income taxes are you subject to:

    How to find your equivalent return

  25. Dave the H. says:

    Jonathan writes, regarding Treasury Direct: “I have linked and used with Emigrant, but this was at least several months ago. I have not done it recently.”

    I am using our Emigrant Direct savings account to initially fund a four-week T-Bill ladder this month (April 2007) with no problems whatsoever.

    Initially fund, since I’ll use the C of I account in TD to fund subsequent T-Bill purchases in this ladder.

    And while you need to manually sweep the funds from the C of I account to a regular bank account, it takes about 30 seconds to do, and appears in the bank account the next morning.

  26. I just opened a new account at Treasury Direct but for some reasons they put a hold on my account saying that I need to sign a form and bring it to my local financial institution for verification. Any idea anyone?

  27. Dog, yes I set up an account last year. It was a pain in the @$$. I had to take it to my credit union for signiture and stamp. But I was up and running after that.

  28. I cannot figure out how to transfer funds from my “Zero-Percent C of I” account back to my bank account. How the heck do you do that?

    As a side note, the Treasury Direct website is a huge mess with numerous user interface design issues and unexpected errors. Over the past 30 minutes of trying to figure out how to transfer funds, the site has displayed an error message and logged me out no less than 5 times. Each time I have to log back in to restart the session. I guess this is exactly what I would have expected from the Federal Government.

  29. A few comments:

    - This is a great tutorial on setting up a ladder. Thank you.
    - I use ING checking for my weekly transfers. As the interest builds over time I just filter it to my Paypal money market which at last look was still paying over 5%.
    - The TreasuryDirect site is the least user-friendly financial site I’ve ever seen except maybe for my student loan company. It needs major work to truly feel accessible to the common user.
    - I just yanked the rest of my scheduled ladder for this year. Interest rates at the last auction fell to 3.33. Even with the non-state tax benefit, I can do better in my credit union or at ING or in my Paypal money mkt. If the yield improves, I’ll get back in.

  30. I look and see these posts are on the older side(4+ months), is anyone still doing this “ladder” or have the recent drops in the interest rates stopped people from buying these t-bills?

    Also, I am looking into doing this so any comments/stories/lessons learned would be appreciated.

    Thanks

  31. With the recent problem with Bear Stearns going broke and JP Morgan buying their stock at $2 a share….stock market down and to scary…the mortgage loan market a problem…and the dollar going down….do you still recommend Treasury Bills and the ladder???

    Big question can you give a ball park of what the interest rate might be at this time???

    Looking for something SAFE for a high dollar amount.

    Thanks!

  32. Lynn,

    Here’s a link to the recent auction results:

    http://www.treasurydirect.gov/RI/OFBills

    The rates are horrible. You’re better off in a high interest internet bank by far. Last 28 day rate was .5% vs. 3.1% at ING right now.

  33. The current yields are pretty low, I am not currently investing in a T-Bill ladder.

  34. Jonathan, You can see a nice chart on yields at http://www.stockcharts.com. Your symbols can be $ust1m $ust3m $ust for prices and yields just do $ust10y $ust3y. more details on stockcharts.com website.

    Lynn, If you want SAFE for a high dollar amount take a look at TIPS. They are the safest of the safe (with returns accordingly).

  35. While securities have posted better yields when compared with govt bonds and the like, most people forget that securities must be sold. I have no idea what the future will bring, but if there are more sellers than buyers (reasonable scenario in the coming years), it may be difficult to unload your securities at prices commensurate with historical yields. The best game plan is to spread your money across many playing fields! I am surprised so many comments scoff at the idea of purchasing low yield bonds. Too many people with all their eggs in one basket!

  36. ProfitTree says:

    Is MC still on this blog? Great T-Bill laddering concept.

  37. Rate is at a lovely 0.50% :)

  38. Oops.. that is 0.050%!

  39. I can’t imagine a worse investment strategy with Treasury bills at historical low levels. Why not do something like prosper where you can have a very diversified series of investments and a significantly higher return, regardless of the default rate of an individual loan.

  40. This is really dumb. Why not just sell a book on eBay once a year. Seriously, setting aside $4000 to make a return of $5.20? No thank you. If you’re looking that hard for money, you need to change your priorities. And btw, I don’t know why you’re making up interest rates that are 5x higher than the current ones on 4 week notes.

  41. Tough crowd. Are all you Lifehacker readers such nice folks? :) I love the accusations for no good reason.

    Check the date, this post was written in March 2007. Over 3 years ago. It is not new. Rates are accurate for the time period. Back then, believe it or not, T-Bills did earn higher rates than available high-yield and online banks.

  42. LOL, thanks Jonathan for the good laugh (I came via your tweet)! Henry and froggits comments are pretty priceless… I’m surprised they didn’t also burn you for mentioning Wamu! :)

    The real question is why did lifehacker recommend a four year old (expired) strategy?

  43. Ha, I honestly have no idea. I appreciate the mention of course, but they never contacted me. It’s pretty much the worst timing possible. The last rate for a 4-week T-Bill as of 8/26/11 was exactly ZERO. 0.00%.

    http://www.treasury.gov/resour.....data=yield

    In March 2007, when this post was written – actually more than *4* years ago – the rate for a 4-week T-Bill was around 5%. On top of that, the interest paid is exempt from state income taxes, unlike the interest from a bank savings account. Here is the link from LH:

    http://lifehacker.com/5835059/.....ent-ladder

  44. I was wondering why the comments started flowing again. Now I get it. Clearly Lifehacker was just thinking proactively about the inflationary times ahead! :-)

Trackbacks

  1. [...] at My Money Blog has made several great posts about “laddering” your Treasury bills to work for you! Also don’t forget this about [...]

  2. [...] How To Build A Treasury Bill Ladder: A Visual Guide ? My Money Blog I’ve written about CD ladders before. This is a similar idea. (tags: investing investments finance) [...]

  3. [...] means you will be able to build a weekly Treasury Bill ladder for as little as $400. Unfortunately, right now yields are so low that I have no reason to bother. [...]

  4. [...] funds comes back each week. Not bad. This diversification technique is called laddering and this link does an incredibly detailed job of explaining it in further detail if you’re interested.Should [...]

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