CD vs T-bill what’s the best move?

Submitted by maccc095 t3_127prqq in personalfinance

I’m new to all of this so please over educate rather than judge lol I have about $50k I’m looking to put towards either CD’s or T-bills. I have a pretty good understanding of how CD’s work, but have been reading up and feel like T-bills might be the better route for the money right now. I don’t know a ton about T-bills or laddering them etc. what would be the best place to put the money? I’m 27 and contributing to my 401k is the only thing I’ve done financially thus far (I’ve been financially illiterate like I said plz don’t judge). Any tips appreciated thanks!!

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penguinise t1_jeffhsn wrote

Treasuries usually have better rates and are exempt from state income tax, but other than the effective return you can consider them to be the same thing as CDs, so select the one with the better return.

You buy Treasury Bills at a discount to their $100 face value, and they get redeemed by the Treasury for $100 on the maturity date. If you buy them at a brokerage, you can sell them early for market price, which may or may not be attractive. In that way they are similar to CDs - you get a guaranteed return if you hold them to maturity and can cash out early for a potential small penalty.

"Laddering" as a concept applies equally to Treasuries or CDs - the idea is to have a "ladder" of them which mature at regular intervals, meaning that you more frequently have access to cash via a maturity event, so you can access the cash without having to sell a Treasury or break a CD.

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maccc095 OP t1_jefvrru wrote

Thank you!! This was very helpful

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DatEngineeringKid t1_jeg6089 wrote

If you ladder though, so be aware that T-Bills and T-Notes work slightly differently.

Bills are sold at a discount. The difference between the price you pay and the face value is the interest.

Notes are auctioned as well, but have an interest rate that is paid regularly. The yield is a combo of the discount and the interest paid. If the yield is lower than the interest rate, you will pay more than face value for the note, but will get regularly interest payments.

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dust4ngel t1_jegibk8 wrote

> "Laddering" as a concept applies equally to Treasuries or CDs ... meaning that you more frequently have access to cash

out of curiosity, why treasury ladders vs ETFs holding treasuries, such as BIL or SGOV?

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BrownPrivilege123 t1_jegy2o2 wrote

ETFs that hold bonds tend to trade at a premium or discount to the NAV of the holdings. I guess you could call it basis risk. There is also the expense ratio to contend with (effectively a managed fee), but it is less work.

I don't know what the minimum amount of capital that you need to purchase a t-bill; however, with an ETF and fractional shares, capital wouldn't be an issue

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nope-absolutely-not t1_jeh2n0d wrote

> I don't know what the minimum amount of capital that you need to purchase a t-bill

From TreasuryDirect: $100 minimum and $100 intervals.

From a brokerage: Nearly always $1000 minimums and $1000 intervals

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NHwmnf t1_jefitgr wrote

You could open a Roth IRA, contribute the max for last year and the max for this year. Then make a plan to automate investing in it for the rest of your career. That would take care of a good chunk.

It would be a good idea to keep a good bit liquid as a 3-6 month emergency fund. You can open a brokerage account and invest in index funds for growth, or if you're risk averse, a simple money market fund will get you very close to your CD return rate and you can pull it and spend it in an emergency without penalty.

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maccc095 OP t1_jefxdcs wrote

I did actually open a roth a couple of years ago but I only made the initial max contribution and never did anything with it :-/ I got a little overwhelmed/intimated with that direct investing so have just avoided it. What do you mean by automate investing?

I have 6 months emergency funds set aside and another chunk of savings I was planning to put in a hysa. Any major difference between that and a money market fund? Thanks!!

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appleshit8 t1_jeg0g1d wrote

I think they're meaning like a target date retirement fund. Basically vanguard or whomever you use will set up a fund that re balances itself based on when you pick a target date. The closer you are to retirement the less stocks it holds and starts switching to less risky investments automatically. You can just automatically contribute $x/week to max out your Ira and it does the rest. Typically like a .1% fee or something

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NHwmnf t1_jeg630g wrote

Well, investing in a target date fund is, in fact, a good way to be on a set it and forget it glide path and can help take the intimidation factor out of investing in the Roth IRA. I meant though, set up your Roth to automatically move money from your savings account to your mutual fund (for example, the target date retirement fund previously mentioned) every payday or month to keep that tax exempt growth going to set you up for the future.

If you can figure out what you're saving this money for, you can find a place for it and keep it going. Take a look at the subreddit's prime directive. After that, there's nothing wrong with enjoying the fruits of your labor either though.

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NHwmnf t1_jeg6but wrote

HYSA or money market fund will get you comparable gains these days where cash is no longer trash

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HorizontalBob t1_jefav0t wrote

CD is a known penalty for breaking. T-Bills either can't be broken or if bought through brokerage, sold on the secondary market. T-Bills avoid state income tax.

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HellsYea t1_jefxqf7 wrote

Noob question: can the ‘penalty’ be enough for a net loss, or you just hurt your potential gain?

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ZachWilsonsMother t1_jeg87w0 wrote

Can’t say for sure about everywhere, but the bank I work at it’s just giving up interest

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desmond2046 t1_jefxhc9 wrote

To compare the effective interest rates of T-bill and CD, you need to take into account that T-bill is exempt from state tax. 1. Find out your marginal state income tax rate Rtax. Marginal means the rate applying to the highest tax bracket you are in. 2. Find out the T-bill rate through brokerage or the recent auction results on treasury direct Rtbill. 3. Compare Rcd*(1-Rtax) with Rtbill.

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Werewolfdad t1_jef76n5 wrote

What is the purpose of the money?

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Supersnoop25 t1_jeffeg9 wrote

What rates are you seeing for either? To me it seems like almost no cds are worth it right now as you can get over 4% in hysa or money market funds. Also how long will you not need the money?

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maccc095 OP t1_jefhfna wrote

I found a couple 14 or 18 month CDs for 5%. Will also be opening a HYS for the rest of my savings, should I put it all in one bucket instead? Don’t need the money for the foreseeable future, no big purchases or anything down the pipeline. Haven’t touched the money in the 5+ years I’ve had it (bad I know I could’ve been making money on it)

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Supersnoop25 t1_jefhw8j wrote

Basically you can't really make a mistake here. 5% cd is pretty good. Personally If it's some fixed income like this I like to have the ability to take it out whenever so I have a pretty large amount in money market funds. Basically cash sitting in an brokerage account making 4.5%.

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CyanocittaAtSea t1_jegk64o wrote

Hey, don’t beat yourself up over it — everyone has their own starting point! And having saved 50k is no small accomplishment, so that’s something to be proud of on its own.

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myburneraccount1357 t1_jefytq0 wrote

Marcus currently has a promo for 10-month CD at 5.05%

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maccc095 OP t1_jeg8ps7 wrote

Any advantages to choosing a shorter term at the slightly higher rate?

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myburneraccount1357 t1_jeg9mkp wrote

From my knowledge, it’s advantage would be you can get your money sooner and reinvest it into something else after, and maybe rates get higher up after those 10 months.

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RC-5 t1_jef8845 wrote

What’s your state income tax rate?

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Curious-L- t1_jefq1tp wrote

T Bills are much more liquid and easier to sell if you ever need the money.

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hammer2k5 t1_jeg2gg0 wrote

Have you considered I-Bonds? The rate on them is linked to rate of inflation. Currently they are currently paying just under 7%. Rates are variable and are revised every six months. You can redeem the bond after 12 months. They're probably one of the best rates of return you're going to find for the time being. You could always park your money in one of these while the rates are good and move it later when/if things change.

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yasssssplease t1_jeg5efp wrote

There is a cap on them, but I agree that I’d put $10 grand in I bonds and then put the rest elsewhere.

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