Understanding Treasury Bills (T-Bills): A Rookie's Guide

What Are Treasury Bills?

Treasury Bills, commonly called T-Bills, are short-term loans you make to the United States government. Unlike typical bonds that pay interest regularly, T-Bills work differently: you buy them for less than their face value and receive the full face value when they mature.

"T-Bills are like buying a $20 bill for $19.50, then getting $20 back a few months later. The difference is your profit."

The Discount Store Analogy

Think of T-Bills like shopping at a discount store. You pay $95 for a gift card that's worth $100, which you can use in a few months. When you use it, you get the full $100 value. Your profit is the $5 difference.

Sarah's Wedding Fund Story

Sarah is saving for her wedding, which is happening in 3 months. She has $10,000 set aside but wants to earn something on this money while keeping it completely safe.

Sarah buys a 3-month T-Bill with a face value of $10,000. Because the current rate is 2% annualized, she pays $9,950 for this T-Bill ($10,000 minus the discount).

Three months later, right before her wedding:

• The T-Bill matures
• The government deposits the full $10,000 into her account
• Sarah has made $50 in profit with virtually no risk
• She uses the money for her wedding as planned

How T-Bills Work (Step by Step)

1. The U.S. Treasury auctions T-Bills: The government needs to borrow money for short-term expenses
2. You purchase a T-Bill at a discount: You pay less than the face value (for example, $9,800 for a $10,000 T-Bill)
3. You wait for the maturity date: T-Bills have short terms, typically 4, 8, 13, 26, or 52 weeks
4. At maturity, you receive the full face value: The government pays you the complete amount ($10,000 in our example)
5. Your profit is the difference: The gap between what you paid and what you received ($200 in our example)

"T-Bills are the financial equivalent of a short and safe journey—not a long adventure with twists and turns, but a predictable path from point A to point B."

T-Bills vs. Savings Account: The Lemonade Stand Comparison

Savings Account:
You put $10 in a piggy bank that pays 1% interest. After a year, you have $10.10.

T-Bill:
You help your neighbor run their lemonade stand. Instead of paying you $10 today for your help, they offer to pay you $10.20 in three months. You accept because it's a better return, and you trust your neighbor completely.

Why T-Bills Are Like Pre-Ordering a Popular Video Game

When you pre-order a highly anticipated video game at a discount:

• You pay money upfront
• You wait a specific amount of time
• You receive something worth more than what you paid
• There's virtually no risk (as long as the game company is stable)
• The longer you have to wait, generally the bigger the discount

Key Features of T-Bills

• Extremely Safe: Backed by the "full faith and credit" of the U.S. government
• Short-Term: Mature in one year or less
• Liquid: Easy to sell if you need your money before maturity
• Tax Advantages: Exempt from state and local income taxes
• Low Minimum Investment: Can start with as little as $100
• No Coupon Payments: All profit comes from the discount

"T-Bills are the financial equivalent of putting your money in a government-protected safe for a few months and finding extra cash inside when you open it."

The School Fundraiser Example

Your child's school is planning a big field trip in 6 months. The PTA has raised $5,000 but doesn't need the money until the trip.

Instead of letting the money sit idle in a checking account, the PTA treasurer buys a 6-month T-Bill with a 2.5% annualized yield. The PTA pays $4,937.50 for a $5,000 T-Bill.

Six months later:

• The T-Bill matures just in time for the field trip
• The full $5,000 is deposited into the PTA account
• The PTA earned an extra $62.50 without taking any significant risk
• The money helps fund transportation costs for students who couldn't otherwise afford the trip

Why People Buy T-Bills

• Safety: T-Bills are considered among the safest investments in the world
• Liquidity: Easy to convert to cash if needed
• Short-Term Needs: Perfect for money you'll need in the near future
• Tax Benefits: Interest is exempt from state and local taxes
• Simplicity: Straightforward investment with no complicated features
• Inflation Protection: Short-term nature means less exposure to long-term inflation risks

Remember: While T-Bills are extremely safe, their returns are typically modest. They're best for preserving capital rather than growing it substantially.

"T-Bills won't make you rich overnight, but they'll help you sleep well knowing your money is safe and working for you."