Investing while at the Academy

CC – As usual, great points all around. MN - You seem to be asking for a guaranteed return on an investment. You think that no one should invest unless there is a guarantee? Guess what? No one would ever invest or be able to retire! There is this magical place called the stock market where historically one will always make money. Buy and hold investing. Long term. That’s what I’m talking about. Not playing the market, but investing in it.

Even with a rate of 0.75% it’s just an insane opportunity. Everyone in their right mind should take at least $11K and do the Roth year split thing. Really, you will most likely not get this chance again in life, and to be able to do this at such a young age. It is such a gift. Talk to anyone who is middle-aged to eyeing-retirement aged and ask them if they wished they had started investing for retirement earlier. I bet I know everyone’s answer. All these young folks being offered this loan are really, really smart individuals and should be able to figure out what this money can do for them long term. TVM should not be a difficult concept at all for them to grasp!
 
1. USAA interest on loan is 0.75%. USAA Interest on CD's is 1.06%
2. Navy Federal Credit Union: CD's 2.00%-3.00% APY
3. Blue Fed Credit Union (Merged a number of credit unions, including some military). Checking: 2%-4% up to $15,000 balance. 0.25 over $15,000

I could go on. There are a lot of options. Even for the "Risk Adverse". Just need to know where to look.

As far as my free advice to my kids, and anyone else, is EXACTLY the same as yours. With ONE EXCEPTION. I do not see a $35,000 (Pot of Money) with a total fee of $671.20 over a 5 year period; (That's $35,000 @ 0.75% interest for 60 months) as being a LOAN. I see it as an "Advance on your pay". I see it as USING MONEY at almost a free charge. Heck; for the MOST Risk Adverse person, they could take $30,000 and open 2 accounts at Blue Credit Union there in colorado, and make 2% and make $2,500 more than the loan interest. If you have a car loan and some other services, you can work up to the 4% on up to $15,000 for each account and have $4,500 profit more than the loan interest paid. And that's JUST for the 5 years. Imagine what you can do with a REAL INVESTMENT.

As for the $35K turning into a million; it's simple math. Use any calculator you want. The S&P500 has averaged, since inception, 10% return. In the last 10-12 years (WHICH INCLUDE THE 2008 Charlie Foxtrot) it's averaged an 8% return. $35000, at 10%, sitting for 40 years, equals just over $1.5 million dollars. The same $35000 at 8% sitting for 40 years is about $760,000. I averaged it at 9% to get to around $1.1 million.

What a concept however. Assuming you didn't need the money for setting up an apartment or similar.
1. Take the $35K loan @ 0.75% interest; payments of $591 per month for 60 months.
2. TOTAL INTEREST on that; $671. (Roughly $135 per year)
3. First year, $30K in Navy Fed Credit Union or other CD @ 2%. Profit for 12months, $600. (Just about paid off entire loan interest)
4. Same first year, put $5K in ROTH IRA S&P500 fund (Through USAA Investments). Forget about it.
5. Second year; $25K in Navy Fed Credit Union @ 2%. Profit $500. Remaining $5k into the ROTH IRA.
6. Repeat each year; $20K, $15K, $10K, 5K with the remaining $5k going into ROTH
7. Total interest on CD's; over 6 years, $2,100. That's $1430 more than the interest paid on the $35k loan
8. Now, the LOAN IS PAID OFF at this same time. You weren't use to the $591 per month that you were paying on the loan.
9. Leave the $35K (ROTH IRA ALONE). Don't need to contribute any more to it. This a ROTH. It is 100% TAX FREE when you want it for retirement.
10. Take the $591 each month; that you used for the loan, and weren't use to having anyway; and put this into TSP. It's tax deferred.
11. By this point, you are a Captain; making a whole lot more money. You financially set 100% for the future. And now, you're just taking care of the normal day to day expenses of living and possibly having a family.

Caveat: OF COURSE LOL!!!
If you plan on GETTING OUT of the military after your 5-6 years, then simply stop at step 9 above. You walk out of the military DEBT FREE and with $35,000 in a ROTH IRA that you can let sit for the next 35 years, TAX FREE, worth around $1 million; until you're around 65 years old and ready to retire. Start your new job, and invest in a 401k or traditional IRA as appropriate.

The OTHER OPTION: Do what a LOT/MOST people do, and live PAY DAY to PAY DAY. Don't use the $35K. Don't invest $590 a month; instead use that for too expensive of a car and other non-essentials. Save only enough to pay for the occasional airplane ticket home to visit; or christmas gifts. Charge a lot and have large credit card bill every month. Basically have no savings or retirement investments. Get out of the military, hypothetically 20 years later with only about $10,000 to your name and no real retirement investment. Then play CATCH-UP. Assuming you have a really good job that pays you enough to put away a lot of extra money.... kids who get full ride scholarships so you don't have that expense. And hopefully you can take all the money you saved for their college and pay off your house.

But again; we are here not to tell anyone WHAT TO DO. Just to tell them what OPTIONS THEY CAN DO.
 
The USAA loan rate is re-assessed each year. I have seen it range from .25 to 1.25 over the last 14 years.
 
CC – As usual, great points all around. MN - You seem to be asking for a guaranteed return on an investment. You think that no one should invest unless there is a guarantee?
I never said that. What I said was that I don't recommend borrowing money to invest, especially in the stock market, because you don't have the $$'s to back it up. But if you can make a guaranteed income by borrowing money, then of course, EVERYONE should do it. When you have money to risk, then risk it.

With CC's credit union rates which are close to 3x above the national averages, then I am saying that every cadet should place that guaranteed bet. I'm not suggesting that they continue to "invest" in 2% rates. Because inflation runs around 3-4% and every year, people's nest egg will lose purchasing power. I'm saying people SHOULD take additional risk. But beyond 2017, smart money might be to put your money somewhere else (versus a simple SP500 fund). TBD. And in 2017 and at a record high stock market, I personally don't see it as a no-brainer to borrow money. I wouldn't. But I surely would borrow money for my business at 0.75%. Or buy a home after a crash in 2011-2013 in the most beat-up area in the country (like FL or AZ) and rent it out. YMMV. :)
 
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My only retort is that the s&p500 if held at least 10 years, has NEVER lost money. And considering the cadets have 40+ years til retirement, that's about as good of a guarantee you'll ever find. Even vs real estate. I remember many times where home prices went upside down vs the loan amount. If you live in the home, no problem. If it's an investment, big problem.
 
My only retort is that the s&p500 if held at least 10 years, has NEVER lost money. And considering the cadets have 40+ years til retirement, that's about as good of a guarantee you'll ever find. Even vs real estate. I remember many times where home prices went upside down vs the loan amount. If you live in the home, no problem. If it's an investment, big problem.
Without question, the SP500 history has done extremely well. Certainly well above real estate appreciation. I have bought and sold properties below market (nearly always on water), subdivided, sometimes short term rented to vacationers and resold, polished up others and resold, etc. A total of about 20 transactions that were considered "investments". Nothing between 2005 and 2015. Well.. I'm up $180K on the 2011 purchased home I bought in AZ (paid $188K in 2011; still $100K below peak 2007 values). I paid cash. So I would have been up about the same if I put $'s in the market in early 2011. But I didn't buy this one for an "investment". I've done well with those situations (1996-2005) and never lost a $'s. The range of gain was from $5K to $170K per transaction. I bought every one well below market and sold them to spin them semi-fast. The time frame to sell was from 3 months to 1 year. History and our own performance has a way of skewing our view. I digress.

My point is, as I said with stocks, when the RE values went up strongly from 1990 to 2006, I looked like a genius because the market was red-hot (especially on water). It was a lot harder to make money in from RE 2007-2011.

That all said, the SP500 past history is valid for the next 40 years if the variables are similar to the past. I think we are in a different era especially with $19T of debt and with other nations coming on strong (a lot more world competition). So we shall see what the future brings. Not so good (as an aggregate) for people and companies who have to compete globally (there will always be outliers). It's why the working class is economically getting beat-up. In 2017, the haves have more and the have-not's have less. What I do believe is if I plunk down $35K into the SP500 at age 22, the past history IMHO is semi-worthless. That's hindsight and everything is changing at warp speed. So I've re-set my mind about the SP500. I pulled my $$'s out of the market and I'm sitting on the sidelines. I could be absolutely wrong. But to me at least, something doesn't feel right. It felt very right in 2011. :)
 
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1. Take the $35K loan @ 0.75% interest; payments of $591 per month for 60 months.
2. TOTAL INTEREST on that; $671. (Roughly $135 per year)
3. First year, $30K in Navy Fed Credit Union or other CD @ 2%. Profit for 12months, $600. (Just about paid off entire loan interest)
Here is the way I look at it. You have a variable rate that is currently at 0.75%. The market assumes that interest rates are going up on this variable loan (and that is why long term C-D's are rising). So I predict the payback interest rate will increase in the next 5 years. But the jury is out. We agree, they are borrowing cheap money. But since the interest for 5 years is SO cheap ($591), that's exclusively because of the rapid payoff. Looking at it another way, at $35K the 1st year of interest is $262.50. So averaging the interest out to $135 is not meaningful.

In fact, in a few short years into the loan (and in your ^^example, they are investing the bulk of their money into a low, 2% (penalty if withdrawl) 60 month C-D; not USAA's. In other words, you are losing money because of inflation (it is running at over 2%). So it seems nothing is for free. All of a sudden, maybe taking out that loan at a garantee doesn't look so good. Especially for a 22 year old. So now we are back to borrowing to put money in the stock market. Yes. That could turn into a loss. For me at least, I'm concluding it might be a waste of "investment" effort unless the moon aligns in your favor. But it sure looks like a solid savings plan.

I have to say, I've come to admire USAA for their marketing idea. Smart. I just don't see the big upside. But who knows... The cadets graduating in 2011 felt brilliant. Maybe not so much for the 2007 grads. But since the term of the loan is so short ($600 a month payments), in the whole scheme of things, I don't think it will matter all that much. Time will tell which guess was better. :)
 
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If I'm not mistaken, the loan rate is not variable. It may change year to year, but once you get the loan, you will be locked into the rate. It won't vary.

On the other hand, interest rates are linear across the board. Meaning, if the loan rate was to go up from 0.75% to 1.25%, so would the savings rates, cd's rates, bonds, etc. As such, it would all be relative and balance.

As for the s&p500, look at what it's comprised of. The $19 trillion debt is government; the S&P500 is companies. The market doesn't care that much about government. When the market corrected in 2008, it's not because of government debt. And 2008 isn't the only time the market has corrected. If you're in your investment years, to be out of it is foolish. If you're in retirement years or close, then definitely you should move to capital preservation instead of growth.
 
If I'm not mistaken, the loan rate is not variable. It may change year to year, but once you get the loan, you will be locked into the rate. It won't vary.

On the other hand, interest rates are linear across the board. Meaning, if the loan rate was to go up from 0.75% to 1.25%, so would the savings rates, cd's rates, bonds, etc. As such, it would all be relative and balance.

As for the s&p500, look at what it's comprised of. The $19 trillion debt is government; the S&P500 is companies. The market doesn't care that much about government. When the market corrected in 2008, it's not because of government debt. And 2008 isn't the only time the market has corrected. If you're in your investment years, to be out of it is foolish. If you're in retirement years or close, then definitely you should move to capital preservation instead of growth.

Didn't mean to cloud - USAA's is a fixed rate loan, and the max amount and interest rate have varied from year to year. The last several years, it has been less than 1%. The decision is usually made in August of each year for the SA CSL amount and rate, and the ROTC/OCS/OTC/Direct max and rate. The terms will be the same for each SA in a given year.
 
Having a $591 per month payback, for 60 months, ($35K loan at 0.5% interest) is a total of $35,460 paid back. That's a $460 interest over 5 years. I rounded off numbers. You are correct, the interest does accrue when you take the loan, but most people I've known, took the loan shortly before or right around graduating time. So there wasn't much additional interest added.
If the interest rate is NOW 0.75%, the 1st year of interest is about $35,000 * 0.0075 or $262.50 interest for the 1st year alone. That said, according to https://www.gobankingrates.com/banking/best-cd-accounts-2017/
"The national average CD account rate on 12-month CDs is just 0.22% APY; on 60-month CDs, the average is 0.78% APY, as of Dec. 5, 2016. " So if the latest loan is at 0.75% and the average 60 month CD (with penalty for early withdrawal) is a push. That also means you signed up for for a heavy pay pack USAA loan so that (on average) you can break even. If you personally have a safe 2% rate, your bank is about 3x higher than the average rate. Double check that.... USbank (My bank) is 0.75 http://cd-rates.credio.com/l/1132/US-Bank which is the same with my credit union.

So my free advice to my children was/is gamble with your own money that you saved (and they should intelligently gamble; a.ka. invest. But $35K or borrowing to our pending Army dentist (DD) or a pending AF doctor (specialist TBD) won't bankrupt them if things go south (no matter if they invested in the market at higher risk or not). So if they take the deal, it's not the end of the world. :) But their best investment was what the career choice (via a great education and avoiding massive loan debt by going into the military) and their future income especially outside of the military. Same advice would have been if my DS (or others reading this) wanted to be a future airline pilot.

So I think advice should be consistent; take out a loan for a business (if needed) and dodge the most amount of debt that you can. And never "invest" in the market on borrowed money unless it is a garantee. Also, I don't see $35K turning into $1M with ease. Again, more hindsight. Before, the USA use to be 4% population with 25% of the world's wealth and a semi-debt free society. That's changing rather fast. According to my eyesight, any such predictions in the future is as cloudy as can be. We might still be in great shape but maybe not-so-much. So my advice to my children is what I did myself. Invest in themselves 1st (school in the right discipline). Place the financial emphasis on investing in your own business. Get out of bad debt ASAP. Save and invest in a blend to diversify. A 0.5-0.75% loan or not, investing in the market going forward (I predict) will be more volatile. Now if someone is a high net-worth individual and gets world class advice from those people who are the best in their field, I might flush some of my pessimism. YMMV.


I am with you all the way on this.

And you forgot that the Cadets will have to pay taxes on any interest they earn before they are able to get it all into an IRA (as many here champion). And the interest they pay to USAA is not deductible. Both of which makes it even less attractive/more un-attractive.
 
I absolutely disagree. Remember Black Monday? I do. 20% gone in a matter of hours. Dot Com Bubble? About a 70% decline (NASDAQ) over 2.5 years. Or how about October 2008? 60% gone over the next agonizing 18 months. Invest in chunks at the wrong time and there can be a lot of pain that takes years and years to recover from. Monthly contributions, i.e. dollar cost averaging, protects against market fluctuations and reduces (not eliminates) downside risk..especially if one invests in mutual funds (which I absolutely hate).
I think the difference, at least with how I invest, is that I invest 3 different categories.

1. Long Term Retirement: IRA, 401k, TSP, Mutual Funds, etc. you get the idea. In those areas, I don't care if the DIA, NASDAQ, S&P500 go down at times. They will; and they will go up. You can't time the market, and if you try, you will lose. But in the long term, those investments have NEVER LOST A PENNY. EVER!!! Long term of course means at least 10 years. And even in the DOWN TIMES; like in 2008, it did not take YEARS AND YEARS to recover. Not unless you STOPPED investing or took your money out. Bases on the profits I had in there prior, I was barely down at all. Yes, I lost a lot of profit, but I was barely down on my principal investments. And by 2009-2010, I was back in the profit again. If I look at 2006-PRESENT DATE, even with the 2008 crash, my portfolio is up about 35%. (Principal investment 2006-present; vs present value)

2. Conservative/Secure Investments: My house, becoming/staying debt free, emergency funds, savings accounts, cash/gold/silver on hand. This is the asset class I use to ensure that I don't have any immediate financial issues. I could lose my job tomorrow, and I could continue to pay all my bills, eat, clothes, utilities, etc. for at least 3 years. WITHOUT TOUCHING #1 above investments.

3. Short term investments: CD's, lock-out accounts, bonds, etc. These are areas where I tie up money that I can't really touch; but only for a short period. 1-5 years. Usually designed if I'm specifically wanting to spend/buy/save for something specific. I use this to buy a car for instance. (Yes, in cash. No loans). I used this for preparing for both my kids to go to college. Used this to pay off my mortgage. Usually discretionary funds, leftover money, etc.

The reason I bring this up, is because, if you are buying stocks and "PLAYING THE STOCK MARKET", then the DOT.Com crash or 2008 would definitely have an affect on you. If you were "INVESTING" in a retirement type fund; IRA, 401K, TSP, or even lump sums, then you weren't affected bad at all. (REALITY CHECK: No investment is going to be POSITIVE for the 40-50 years of your life. That's how economics, inflation, deflation, etc. work). Matter of fact, I was quite happy with the 2008 crash. The market needed a reset; and for the reason you mentioned about dollar cost averaging, it was AWESOME. I was buying monthly at 25-35% of traditional costs. Which means, I was buying a whole lot of shares at a fraction of what I was buying them for. And when the market recovers, which it will, I will be in great shape. (Which is exactly why I AM in such financial great shape today).

I do agree with you on "DOLLAR COST AVERAGING". But let's clarify something here. Except for PRIVATE mutual funds, stocks, etc. (Playing the stock market), there's no way that you are ALLOWED to invest that entire $35K into your RETIREMENT ACCOUNT. You're only allowed to put in $5500 per year. ($6500 if you're over 50 years old). If you read back a few posts, you'll recall that I said if you were going to invest the $35K, you'd put the $5500 into your ROTH IRA, the remainder in CD's, then each year, roll $5500 worth of CD's into the ROTH IRA. This also BENEFITS YOU if there is a market crash. Then your $5500 will buy even more. But you only invest $5500 per year.

A lot of people are afraid of investing. Many people are afraid of the market. But there is a BIG DIFFERENCE in "Investing in the market" and "Playing the Market". If you invest the $35K ($5500 per year) into a ROTH IRA for your retirement, that is one of the safest things you can do. And if you STOP putting money into it, after the 5 years of the loan money, and let it sit for 40 years, that $35K will be worth in the neighborhood of $1.2 million dollars. That's without putting any more into it. But if you're not into investing, that's cool. Use some, all, OR NONE of the $35K for what you need. Don't invest it. Just put money into a savings account. Hopefully the cadet, when he graduates, will at least look into TSP or some other retirement plan. (Same exact risk as investing in an S&P500 Roth IRA), but whatever.

Remember though: This topic started and evolved, because questions were being asked also about doing something with the $35K (Loan/Advance) that is offered. Some will use some/all of it to set up an apartment. Some will use some/all of it to invest. Some will use some/all of it to pay off debt they came in with. Some will use some/all of it to buy a new car or other frivolous things. Neither I, nor anyone else is telling anyone they MUST do anything with the money. These young men and women are old enough now to make decisions for themselves. If they don't know what to do, then make the decision to LEARN. But no one is saying a person should/must do anything with their money. At the same time, I don't think anyone you tell a cadet what NOT TO DO with this available money. No one should tell them to NOT TAKE the money; or to NOT INVEST the money; etc. All we should do is provide experience and options. It is up to them to decide.

Caveat: You knew it was coming. I think there are SOME THINGS that we should definitely recommend AGAINST USING the money for.
1. Buying drugs
2. Setting up a meth-lab
3. Laundering money for the mob
4. Using to start fires on camping trips
5. Use it to patch holes in sneakers

etc.

Years and years might have been a bit much, but theS&P 500 started to go down in Oct 2007 from a level about 1560 (an all time high), dropped to about 6500 and did not get back to the 1560 level until April 2013. That is not just a minor dip. And, IMO, to say you weren't hurt badly because you had a good profit heading into Oct 2007 is an unusual perspective and somewhat misleading to those who read it without really understanding what you said. And you can never discount emotions when the market does this. No doubt many, including Cadets, likely sold out after the first 20-30% drop. And who could blame them?
 
And you forgot that the Cadets will have to pay taxes on any interest they earn before they are able to get it all into an IRA (as many here champion). And the interest they pay to USAA is not deductible. Both of which makes it even less attractive/more un-attractive.

Cadets, even during the first half year, provided they were allowed to claim themselves on their tax return, i.e., parents didn't claim them as a dependent, can max out their Roth IRA at $5500. They have earned income of $6200+ the first tax year and $12,000+ in subsequent years as a cadet; doesn't matter that they don't necessarily see that net in their paycheck. So, why would they owe any taxes on the interest earned?
 
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Years and years might have been a bit much, but theS&P 500 started to go down in Oct 2007 from a level about 1560 (an all time high), dropped to about 6500 and did not get back to the 1560 level until April 2013. That is not just a minor dip. And, IMO, to say you weren't hurt badly because you had a good profit heading into Oct 2007 is an unusual perspective and somewhat misleading to those who read it without really understanding what you said. And you can never discount emotions when the market does this. No doubt many, including Cadets, likely sold out after the first 20-30% drop. And who could blame them?

Retirement investment funds are for the long haul. I did not get hurt because of the market drop in 2008. I mentioned that if you sold back then, that you probably felt it. But you shouldn't be selling back then. That is the difference between investing in a retirement account and "playing the market". Those who sold anything back then, do not know how to invest in a retirement account. A retirement investment is long haul. You don't take money out of it when the markets go down. That's why mutual funds don't pay as high of returns and dividends as other investments. If a person wants to play the market, then have fun. Just don't PLAY with your retirement account.
 
Cadets, even during the first half year, provided they were allowed to claim themselves on their tax return, i.e., parents didn't claim them as a dependent, can max out their Roth IRA at $5500. They have earned income of $6200+ the first tax year and $12,000+ in subsequent years as a cadet; doesn't matter that they don't necessarily see that net in their paycheck. So, why would they owe any taxes on the interest earned?

Let me clarify my previous post a bit...Cadets, even if claimed on their parents tax returns as a dependent, can still max out their Roth contributions to $5500 or their modified AGI, whichever is less, however, they cannot claim the "savers credit" on form 8880, to reduce their federal tax liability.
 
To bring this back on track to the Original Poster's inquiry:

1. At the academy, I feel the cadets don't get paid enough to consider "Investing" at this time. Wait until close to graduation.
2. While the first year is difficult to save anything, try to save at least $200 a month in subsequent years. Still leave plenty of money to spend. This will give them $8,000-$10,000 when they graduate. This should be more than enough to get started in a new apartment; some furniture; kitchen stuff; etc. (Unless of course they want a $6,000 SleepNumber bed and 5th avenue living room sets. But for a STARTER setup; no problem.)
3. Depending on personal finances; after or close to graduation; e.g what they came in with, graduation gifts, etc. buy a reliable used car. If needed, use some of the ultra-low starter loan for a good reliable used car. (Don't need a $35,000 car. Can get very good and reliable for $10-$15K)
4. THEN; after graduating, consider investing. This can be done by simply setting up a monthly allotment into a good mutual fund (Recommend S&P500 fund). Not sure what options are available through TSP. But start there for investing. Next choice would be through USAA if that's the back the individual is having their paycheck go to. They have very good investment services.
5. How to best use your money to invest; e.g. use the ultra-low starter loan money, monthly contributions, etc. Read this thread in it's entirety for different perspectives and opinions.

Best of luck
 
Anyone want to discuss how much interest you'll get out a typical savings account?
 
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Anyone want to discuss how much interest you'll get out a typical savings account?

Typically, they suck. However; many credit unions, like mine, pay 2% on a balance UP TO $15,000. Anything above that balance gets 0.25%. But, if I had ADDITIONAL services, e.g. car loan, mortgage, investments, etc. they would pay between 3-4% with a balance up to $15,000
 
Cadets, even during the first half year, provided they were allowed to claim themselves on their tax return, i.e., parents didn't claim them as a dependent, can max out their Roth IRA at $5500. They have earned income of $6200+ the first tax year and $12,000+ in subsequent years as a cadet; doesn't matter that they don't necessarily see that net in their paycheck. So, why would they owe any taxes on the interest earned?

Let me clarify my previous post a bit...Cadets, even if claimed on their parents tax returns as a dependent, can still max out their Roth contributions to $5500 or their modified AGI, whichever is less, however, they cannot claim the "savers credit" on form 8880, to reduce their federal tax liability.

My son has already established a Roth IRA with Fidelity in 2016 (glad to see a Fidelity office right across the highway from the Academy). It is my plan to deposit the $5500 into his account each year while he is the the academy. Had he stayed at UT-Austin, I was looking at another $80k to get him to graduation, so $22k seems like a bargain!
 
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