Capital Preservation Strategy: Using High Yield Savings and Treasury Direct Accounts
One of the best methods of preserving capital while earning a reliable return is to leverage a combination of a high-yield savings account and a Treasury Direct account. Here’s how you can effectively use these tools to safeguard and grow your savings.
High-Yield Savings Account
Start by opening a high-yield savings account with a reputable bank, such as Citi. The interest rate on this account will allow your savings to grow steadily, while remaining easily accessible in case of emergencies. This savings account serves as your base for saving money over time.
Treasury Direct Account and T-Bills
Once you have saved up a few hundred dollars in your high-yield savings account, you can take the next step by purchasing 4-week T-Bills through your Treasury Direct account. Treasury Direct is a U.S. government platform where you can buy and hold U.S. Treasury securities, which are one of the safest investments available.
The Treasury auctions for T-Bills occur approximately every two weeks, so once your money is ready, you can place an order for the next available auction. The T-Bills will be purchased at a discount, meaning you’ll pay less than the face value, and the difference represents the interest you will earn. For example, if you buy a $100 T-Bill, you might only pay $90 and change (depending on the interest rate determined at the auction).
This process of buying T-Bills is a great way to earn a predictable, low-risk return on your savings. The discounted nature of the T-Bills means you receive your interest upfront, and your capital is preserved. After the auction, the money used to purchase the T-Bills will be withdrawn automatically from your savings account, making the process seamless.
Automatic Rollover and Reinvestment
To maximize returns and reduce effort, you can set your Treasury Direct account to automatically roll over your T-Bills for 12 periods or more. This means that each time a 4-week T-Bill matures, the principal (the amount you invested) will be reinvested in a new T-Bill. Any interest earned from the T-Bills will be transferred back to your high-yield savings account, where you can either leave it to grow or reinvest it into more T-Bills.
This auto-rollover strategy allows you to compound interest without needing to manually make reinvestment decisions every month, making it an efficient way to grow your savings over time.
I-Bonds: A Treasury Alternative
In addition to T-Bills, another valuable savings tool to consider is the I-Bond. I-Bonds are Treasury Bonds that are indexed to inflation, meaning they offer interest rates that adjust based on inflation rates. This makes them an excellent hedge against inflation, as they preserve purchasing power over time.
In recent years, I-Bonds have offered rates as high as 8% annually, making them an attractive option for savers looking for protection from rising prices. I-Bonds also have the advantage of being tax-advantaged. The interest is exempt from state and local taxes, and federal taxes can be deferred until the bond is cashed in or matures, making them a tax-efficient savings vehicle. I-Bonds can also be used for long-term goals, such as funding a child’s college education.
Conclusion
By utilizing both a high-yield savings account and a Treasury Direct account for T-Bills and I-Bonds, you can build a reliable, low-risk savings strategy. This combination allows you to preserve capital, earn interest, and protect against inflation—an excellent approach for anyone looking to safeguard their financial future.
If your money is in a restricted account, such as a retirement account, you should opt for an investment that carries no risk to your principal while offering an interest rate comparable to a 4-week T-Bill.