What Is A Short Term Treasury Ladder? Let’s Discuss

Using a short term treasury ladder can be a low risk way to earn a return on cash Just sitting in the bank

Hey friends! Today we're going to talk about a potential option to invest your money: short-term US Treasury bonds.

Now, at the outset we just wanted to say each person’s situation is different and this is by no means meant as investment advice. We simply want to give you the basic information and let you follow up with more research or determine if this is right for you and your family.

To start out, we know some of you might be thinking, "Whoa, hold on a minute there, investing sounds complicated and risky!" But fear not, my friends. Investing in short-term US Treasury bonds is a safe and easy way to grow your money over time.

The reason we pick short term Treasury bonds at the moment is that you can earn a decent return (~4-5% annualized at the time of this writing) and still be able to not tie up your money for too long.

Now there are things like taxes to consider (this will be taxed at a short term gain), but it’s much better than having your money just sit in a savings account and offers similar safely.

So in this quick 3 minute read, we'll discuss:

1. What is a Treasury bond and what’s the minimum investment?

2. How do you earn interest on your investment?

3. What are the typical issue time lengths?

4. How to build a Treasury ladder?

   So let’s get started!

Defining A Treasury Bond And The Minimum Investment Terms

So, what exactly is a US Treasury bond? Well, simply put, it's a loan you make to the US government. In exchange for your loan, the government promises to pay you back with interest.

It's kind of like when you lend your buddy a few bucks to buy lunch, and they pay you back with a little something extra for your trouble.

Now, you might be wondering, "What's the minimum investment for a Treasury bond?" I'm glad you asked!

The minimum investment for a Treasury bond is $100 when you buy it through Treasury Direct. That's right, just one hundred bucks can get you started on the road to financial security.

Several brokerages will likely require a bit higher (say $1,000) per bond for a treasury ladder (more on that below).

Because you cant sell treasuries in your Treasury Direct account before they mature (you must hold them to maturity or transfer them to a brokerage account) and you will have to do a lot of manual labor to get the exact ladder you want from Treasury direct, it’s easier if you buy them in a brokerage account if you are willing to invest the extra cash.

Ok, So How Do You Earn Interest?

So, how do you get paid as an investor in a Treasury bond?

Well, there are two ways. First, you receive interest payments every six months until the bond matures. Second, when the bond reaches its maturity date, you receive the full amount of your original investment back.

Now, there are two types of Treasury bonds: Regular and Zero-Coupon. Regular bonds will pay you interest along the way until the bond matures (and you get all your money back). Zero coupon bonds will not pay you any interest along the way but instead pay you all of your interest at the end with your money back.

There are considerations here for investing in one or the other (tax can be a big one) but we are not going to get into that here. For the purposes of a short term Treasury ladder, the only question that matters is do your want to get paid interest along the way (then you want a Regular bond) or do you want to collect all your interest at the end (then it’s a Zero Coupon bond).

What Are The Typical Issue Time Length Options

But what about the issue time lengths offered for Treasury bonds? There are three: short-term, medium-term, and long-term.

Short-term bonds have maturities of one year or less, medium-term bonds have maturities of 2-10 years, and long-term bonds have maturities of more than 10 years.

For our purposes today, we're going to focus on short-term bonds, as they're the easiest to understand and the most accessible for most investors..

Building a Treasury Ladder

Now, let's get into the nitty-gritty of building a Treasury ladder. A Treasury ladder is a strategy where you invest in multiple bonds with staggered maturities. This helps to minimize your risk while still providing a steady stream of income.

Here's how you can build a Treasury ladder with near-term maturities:

1.     Determine your investment amount: First, you need to figure out how much money you want to invest. Remember, the minimum investment is $100 on Treasury Direct and higher with a brokerage.

2.     Choose your bond maturities: Next, you'll want to choose several bonds with staggered maturities. For example, you might choose a bond that matures in six months, one that matures in one year, and one that matures in 18 months.

3.     Buy your bonds: Once you've chosen your bonds, it's time to buy them! You can do this through the US Treasury's website or through a broker or financial advisor.

4.     Repeat: As your bonds begin to mature, you can reinvest the money in new bonds with the same staggered maturities. This helps to maintain your ladder and keep your investment steady over time.

For the purposes of a near term treasury ladder, we have selected a full period of one year in the video above with four three month periods. This means that every three months you will get back 25% of your original investment with interest and get all of your cash back withing one year.

Final Thoughts…

And there you have it, folks! Building a Treasury ladder with near-term maturities is a simple and effective way to invest in short-term US Treasury bonds. By following this strategy, you can minimize your risk while still earning a steady stream of income.

Watch our video above for a practical way to set this up through a brokerage account.

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