What kind of rate are you expecting to get from a treasury bill ladder?A ladder of 6-month Treasury Bills would yield about 5.297%, a ladder of 4-week Treasury Bills about 4.936%. (See http://wwws.publicdebt.treas.gov/AI/OFBills) Someone more skilled at Bond math would have to convert this to APY.If we assume a federal marginal tax rate of 25% or 15%, state marginal tax rate of 9%, in a taxable account we have the after-tax returns of:Instrument Rate After Taxes After Taxes----------------- ------ (25% fed, 9% state) (15% fed, 9% state) ------------------- -------------------6-month T ladder: 5.297% 3.97% 4.50%4-week T ladder: 4.936% 3.70% 4.20%Emigrant Dir. mm: 5% 3.30% 3.80%Charlie could punch holes in the above math (converting to APY, for example), but you would still see that the different tax treatments can make some lower-yielding instruments be better than a little higher yielding instrument, in this case, direct debt of the federal government being exempt from state and local taxes, but interest on bank deposits generally being taxable at all levels.While there is a little work in getting a Treasury Bill ladder set up, once it is in place, on TreasuryDirect it can be self-sustaining (scheduling recurring purchases to occur when the Treasuries mature), and the difference between the purchase price (for Treasury Bills, is at a discount to face value) and maturity value (at face value) is the interest one had earned.Where this fails to be a good comparison to, say, allowing CDs to roll into new CDs, is that Treasury Bills are all in units of $1,000; one can buy a 4-week Treasury at $996.23, at maturity it is worth $1,000.00, and if at that time the rate is the same, the new purchase price is again $996.23, leaving $3.77 to deal with. So it is those odd amounts (the interest) that we then have to figure what to do with. (Well, that could go towards the price of purchasing the next rung in the ladder, but until then it isn't earning interest if left at TreasuryDirect.)Is the increased interest after taxes worth the reduced liquidity and increased work on getting this set up? Probably not for small amounts, but at some point it could be worth it. For example, in the case of 6-month Treasury Bills, each $1,000 rung would give me $7/yr more after taxes than that same $1,000 in Emigrant Direct. At some point it could add up to real money.I doubt that one would want to do this with all of one's money, e.g., one's "emergency fund" should still have a component that is quite liquid (and usually one forsakes yield for liquidity) so there will always be a place for a money market account or a money market fund; but if one has a large emergency fund it may make excellent sense to deploy a good part of the emergency fund in something a little less liquid (such as a Treasury Bill ladder or a short-term CD ladder, or, in my case, in the past I have purchased Savings Bonds) so some of the money could have a higher yield than in typical money markets.
Instrument Rate After Taxes After Taxes----------------- ------ (25% fed, 9% state) (15% fed, 9% state) ------------------- -------------------6-month T ladder: 5.297% 3.97% 4.50%4-week T ladder: 4.936% 3.70% 4.20%Emigrant Dir. mm: 5% 3.30% 3.80%
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