The best advice a finance advisor can give a client is to have a diversified investment portfolio. This means that there should be a variety of investments that run along a continuum of risk, i.e. some investments will carry more risk than others.
From time to time you will come across an investment that is stable, predictable and has a short lifespan. This is what a T-bill represents.
A T-bill (or treasury bill) is a way for the United States government to make temporary loans from its citizens in order to finance some of its projects.
How it works
A T-bill has a face value and can only be redeemed for that face value. The investor will buy the T-bill at a discounted price. When the lifetime of the bill expires the investor then redeems the T-bill at its face value, making the difference as a profit. The following is an example of how the T-bill works:
The T-bill’s face value is $1,000. The investor will buy that T-bill for $900. S/he will then gain $100 when the T-bill matures and can be redeemed for the full face value of $1,000.
T-bills are sold for values of $1,000 or more. You are not restricted to how many of these bills you are allowed to buy. The only proviso is that you can only redeem the T-bill for its face value at the time when it matures and becomes eligible for redemption.
Many investors will include T-bills in their portfolio as it provides them with a steady and predictable, quick turnover investment. The return is also guaranteed since the United States National Treasury guarantees it. Short of the Treasury failing the face value of the T-bill will be paid out at the time of its maturity.
T-bills are not always available. They are issued from time to time by the government and the amount available is dependent on how many the government wants to put out into the marketplace. Of course banks and other large organizations have a better chance of buying T-bills in large quantities because they have large amounts of cash available that they can invest in this low-risk investment.
Usually the maturity time of a T-bill could be anything from 90 days to a year making it possible for the investor to determine the term of his / her investment. It is important to remember that the T-bill can only be redeemed after maturity and only against its face value. It doesn’t accrue more interest the longer it takes to redeem the bill.
When you are an inexperienced investor with a limited amount of money to invest, this could be a safe, predictable way of earning more money that you can use for other investments. It is a good start for your portfolio and for your cash flow if you need it.
Whatever you invest in, it should be well-thought through and have a measure of predictability to it. Start out safe in order to thrive.