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I OPENED MY FIRST bank account in the US at a local credit union (CU) close to my workplace. The CU had several convenient offers for employees of our company. With minimal effort, I opened checking and savings accounts, got free checkbooks and a credit card despite having no credit history in the US.
I was so pleased with the convenience that I handled all my banking needs through this CU for many years. That included direct deposit of my salary, payments and withdrawals, a car loan, and certificates of deposit (CDs) as my savings grew. I still maintain my checking account here and occasionally enjoy special favors as a longtime loyal customer.
Eventually, I realized that I earned very little interest from the bank deposits. I shopped around, found other banks with better rates, opened several accounts here and there, and moved my money around.
I felt good about being proactive and getting a better return on my cash reserve. But that feeling was short-lived as I started learning more about personal finance and investments. Tired of chasing yields in bank accounts, I eventually embraced US Treasurys (debt issued and backed by the US Government) as my alternative to savings accounts and CDs.
For those unfamiliar with US Treasurys, think of them as CDs with maturities ranging from four weeks to 30 years. They’re widely used as a “safe investment” by individual, institutional and even sovereign investors around the world.
There are some key differences, though. Bank deposits are insured only up to $250,000. US Treasurys, on the other hand, are backed by the full faith and credit of the US Government. Therefore, there is virtually no default risk regardless of the investment amount.
Treasury interest rates, both short-term and long-term, are heavily influenced by monetary policy actions of the US Federal Reserve (Fed). Treasury interest rates directly affect many interest rates we encounter in everyday life: bank accounts, CDs, mortgage, car loans, personal and business loans, and so on.
Treasury interest rates are often higher than comparable bank products. Why? Because the intermediary financial institutions take their cut for operational costs and profits. Result? Suboptimal, or sometimes almost non-existent, interest on bank deposits.
But wait. What if I need my money back?
With bank deposits, I can walk in and withdraw cash from my account. If my money is locked in a CD, I may have to pay a penalty for early withdrawal, but I can still access it fairly quickly. What happens if I’m holding Treasurys? Do I need to wait until maturity?
That leads us to another important aspect of US Treasurys: their extremely high liquidity.
I can certainly buy newly issued Treasurys and wait until maturity, but I don’t have to wait for these events. Investors around the world buy and sell Treasurys in the open market every day, making them one of the most liquid investments in existence.
Their liquidity, safety and meaningful return make Treasurys a compelling alternative for both short- and long-term cash reserves.
Sounds interesting? That’s exactly how I felt after doing my own research. All I needed to figure out was the best way to invest in them.
Instead of buying Treasurys directly from the US Treasury, I use my brokerage accounts and buy and sell individual Treasurys or Treasury exchange-traded funds (ETFs) in the open market, just like stocks or funds. (I used to participate in Treasury auctions through the brokerage account to buy new issues and set my holdings to auto-roll upon maturity, but I eventually stopped doing that to keep things simple.)
For annual expenses and short-term cash needs, I like short-term, highly liquid, Treasury ETFs with a practically negligible expense ratio.
For money expected in three to four years, I favor short- and intermediate-term Treasury Inflation Protected Securities (TIPS) ETFs. TIPS have a lower interest rate compared to equivalent regular Treasurys, but their principal is adjusted with inflation, helping mitigate the risk of unexpected inflation.
For cash reserves further into the future, five years or more, my preference is a ladder of individual TIPS bonds, each maturing in a specific future year. Bond trading is slightly more involved than ETFs or stocks, so target-maturity TIPS ETFs can also be a reasonable alternative despite their slightly higher management fees.
Is there a catch compared to keeping money in conventional bank accounts?
I can’t think of any, but there are two noticeable differences worth understanding.
First, unlike money sitting in bank accounts, Treasury investments fluctuate in value because they constantly change hands in open markets. For short-term Treasurys, the fluctuations are usually tiny. For intermediate- and long-term Treasurys, the swing can be more noticeable, especially when there’s a major change in the interest rate expectation. Thankfully, these fluctuations are usually modest, and over time Treasurys often come out ahead compared to bank deposits.
The second difference deserves a bit more attention.
With a bank account, you can get hold of your money almost immediately. Treasury investments, however, may take a couple of business days to turn into spendable cash. You need to sell the ETF or bond during market hours. Once the transaction settles, usually the next business day, the proceeds can then be transferred out to the checking account for spending. In some cases, you may be able to carry on your spending activities directly from the brokerage account.
Over time, I shifted most of my liquid savings to Treasurys because of the improved result. Yet I still see many people leaving large cash balances in bank products or chasing yields from one bank to another.
I suspect the main reason is simple: lack of familiarity with US Treasurys.
Sanjib Saha retired early from software engineering to dedicate more time to family and friends, pursue personal development and assist others as a money wellness mentor. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is the president and cofounder of Dollar Mentor, a 501(c)(3) nonprofit organization offering free investment and financial education. Follow his nonprofit on LinkedIn, and check out Sanjib’s earlier articles.
Thank you Sanjib for another gem. Ever since I started in 2021 to read Humble Dollar without fail every morning, I always pay special attention when you publish an article. Because, your articles give so much learning on practical aspects of Personal Finance. I’m happy for a fellow Software Engineer to bring the same rigorous analysis as done in coding to his writings on Finance related topics. Continue your great work here and at your Dollar Mentor.
How you manage your short term savings (via VTIP and VUSB) is clear to me now via this article. Could you please enlighten us about what you prefer for your longer term investments with the money you will not need for five or more years that can be allowed to compound and grow. If you use any specific low expense ratio Vanguard ETFs or mutual funds for that purpose, could you please share that detail here? I would like to see how aligned I’m with your long-term investment approach. Thanks again.
Senthil, it’s so kind of you to share the encouraging words. I’m also glad that you spotted my approach to personal finance/investment issues through software problem-solving techniques. Thank you!
For longer-term needs, I almost exclusively use individual TIPS until I claim my own Social Security at 70. My ladder has a few holes – e.g., if I don’t like the available individual TIPS for a specific year, I’d skip that year and use divide the fund between TIPS maturing the previous year and the following year. I plan to keep extending the ladder depending how future years play out.
Outside of these, I have two R