Investing while at the Academy

Pima. Your advice is sound. Normally, you want to be close to your investment so that you can micromanage things. At least in AZ, Stealth Junior is renting to people in the F-35 club (Luke). We have flight instructors in our hood. Great people/neighbors that take care of the place. They are to the next level over your typical renter. So no matter where and what you rent, having the right renters is paramount.

Normally, SFH's don't have great ROI. The SFH model only works long term with higher than average appreciation OR renting by the week on a VRBO like site. To make $$'s renting, normally, a good place to start is an 8 place unit. Also, hiring people in AZ (assume the same in FL) is "cheap" for lawn work etc. Most people who rent in our hood mandate the tenant hire a landscaper. It costs me $80 a month (2 sessions per month). So at least in AZ, stucco lasts decades as well as the tile roofs. I've bought my unfair share of properties for investments (20+). I plan on exiting on this one before major repairs are needed (inside of 10 years).

Back to the topic. Stealth's son paid off his Surprise AZ home. For the foreseeable future, he can expect to make 4% a year on appreciation and about 7% on rent of his current value. That's $21K a year before expenses on an investment that is paid for and he has sold people (AF) that are renting from him. In his specific situation, it was a GREAT bet. We all know it's really easy to lose $$'s too. Not currently in his situation. But renting to military officers is kind of smart. My mistake is I didn't buy a few homes. Could-have-would-have-should-have. But in his situation, that was a smart use of his $35K!!
 
Very much agree with what others have said on here re: investment opportunities for the loan. Dang, if I could borrow that much money at that interest rate, knowing what I know now, I’d jump at it. Take some to set up ‘house’, buy uniforms, etc. but invest the rest! Nobody gets an opportunity like this one in life. Someone upthread said they would not want their kid to start out $35K in debt. If anyone is looking at this as ‘debt’, then they are thinking about this phenomenal opportunity all wrong and do not fully comprehend the time value of money!
 
In all fairness. There are some people that really don't know how to save, invest, and/or budget their income. I know people who literally live paycheck to paycheck. And this is with a decent income. The live beyond their means. They aren't cost/price-conscious of what they do buy. They lease a car, in the belief that they will ALWAYS HAVE A CAR PAYMENT ANYWAY....... So they keep a car payment of $400-$600 per month forever. They charge to their credit cards, and make minimum payments each month. They put almost NOTHING in savings.

As such, there are some people that this $35K loan, truly IS DEBT. And for them, they SHOULDN'T TAKE IT.

Here are some ALARMING FACTS: And it's NOT ALL because people have low paying jobs. It's because they don't know how to save, invest, and/or budget, and they live beyond their means. They think "Because so-and-so has this, I DESERVE IT TOO".

1. According to a 2016 GOBankingRates survey, 69% of Americans have less than $1,000 in their savings accounts.
2. 34% have no savings at all
3. Only 15% of Americans, have $10,000 OR MORE saved
4. The Mean Average of American's have in their RETIREMENT account; about $95,000. That doesn't sound too bad, except most people don't know the difference between MEAN and MEDIAN average. MEAN; means to ADD all numbers and divide by total entries. E.g. 100+110+95= 305 divide that by 3 (Because there's 3 numbers) and the MEAN AVERAGE is 101.66. MEDIAN average means the exact MIDDLE of the list. So, if there's 100 people surveyed, the MEDIAN would be HIGH to LOW and the 50th person in the middle would be the MEDIAN Average.
5. So, the MEDIAN average of Americans with a RETIREMENT account, is just $5,000. So, those who save well, make up for those who don't save at all when it comes to STATISTICS.
6. 7.7% of Americans don't have a Bank Account
7. 12% of Americans (38 Million) literally live paycheck to paycheck. They spend literally every penny each week/month. Yet, 2/3 of those people make at least $41,000 per year. Which is above the poverty level. In other words, they have no excuse other than living beyond their means.
8. Millennials; Age 35 and younger, have a SAVINGS PERCENTAGE of NEGATIVE 2%. Which means, they have (ON AVERAGE) taken on so much student loans and other debt; and are living beyond their means; that they actually owe more than they could pay off and save. (Sorry; but very rarely can anyone justify to me student loan debts that can't be paid off in a couple years).
9. Mean average of Student Debt is $38,000. (Mind you, this is MEAN). This has the opposite impact vs the mean savings. What I mean is, there are plenty of student loans much higher.

Bottom line is; there are plenty of people that probably "Shouldn't" take this $35K loan. Who they are??? Only they or their parents will probably know. On the other hand; I did a lot of stupid things when I was 21-22 years old. I learned from most of them. Maybe this part of growing also. We'd love to be able to tell our kids all the right and wrong things in life; to spare them from making the same mistakes. But that doesn't always work. Sometimes, a person has to touch the hot stove and burn themselves to realize it's hot. And the BEST thing we can do as parents when they do screw up royally, is to not tell them that it's alright. We need to tell them they are Charlie-Foxtrot, but we are there to help them through it.

So for some, this is a great opportunity to use $35K wisely. But for some others, they probably do need to stay away from it. Then again, if the kids were somewhat responsible during their 4 years at the academy, they wouldn't need a loan and it wouldn't be offered to everyone; and used productively by many. So I guess it's a good thing.
 
parentalunit2 said:
Very much agree with what others have said on here re: investment opportunities for the loan. Dang, if I could borrow that much money at that interest rate, knowing what I know now, I’d jump at it. Take some to set up ‘house’, buy uniforms, etc. but invest the rest! Nobody gets an opportunity like this one in life. Someone upthread said they would not want their kid to start out $35K in debt. If anyone is looking at this as ‘debt’, then they are thinking about this phenomenal opportunity all wrong and do not fully comprehend the time value of money!
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Last Spring, I had the conversation with our son about this very topic who is a recent grad. I encouraged him to borrow because he is in medical school and the HPSP scholarship $$'s doesn't change based off of location. He is in Boston which is about as expensive as Los Angeles and therefore his HPSP scholarship of $26K before taxes probably meant that he would have to borrow from somewhere just to live. Graduate loans are 6.8% and the interest accrues from the time you borrow. So borrowing some of the loan was a good deal. Actually, it's not so obvious as he has to hit a minimum payment so that means he had to take out more up front than he needed.

Anyways, he took out the loan and 4 months later, he paid it off. As it turns out, he learned the ropes on getting by cheap like attending daily medical school seminars where he gets fed (with extras at the end), shopping at the Goodwill for clothes, etc, etc. Now, he is able to save $500 a month, so, he didn't need a loan.

His logic was he needs to be spent his time studying versus worrying about investing. He s therefore investing in himself (getting a great STEP score, building relationships, learning, etc, etc). So unless you have a garantee rate above the low interest rate they charge grads, there still is risk. Post bubble and in the sand states, buying real estate was a darn good bet. But that was an era where everything aligned up perfectly. Of course there was some risk. If their wasn't risk, banks would have bought up all of the houses themselves. And/or, they wouldn't bother making sure the borrower could afford the payback (as it was a sure bet). In hindsight, everything is 20-20.

With that said ^^, I'm going to go out on a limb and say the Dave Ramsey's of the world would NEVER advise borrowing $$'s to invest in stocks nor advise on borrowing for real estate. That's because if someone saves $35K and loses some or all of it, they are back as much as $0. If someone who borrows money loses it all, they are at a loss; $-35K. In 2016 and 2017, trying to get a guaranteed interest rate above 1% isn't easy. Hence today, there is risk of losing dollars on their $35K. If someone knows a no risk way of making even 3%, let me know. I don't know of any. That's the rationale as to why others advise people NOT to loan any money to invest in stocks, bonds, real estate, etc.
 
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Christcorp said:
On the other hand; I did a lot of stupid things when I was 21-22 years old. I learned from most of them.
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You described what I like to call "tuition". Some people learn from their early years paying their "tuition" while others don't.
 
I’m just speaking from my experience and what I have seen cadets be able to grow this money into over the years. I myself do not ‘save’ money, I invest and build wealth. Now some parents will be able to counsel their progeny on this and others will not. For those who can, they realize the golden opportunity this loan presents for their child.

And please don’t let Dave Ramsey enter into this discussion. He just wants to sell you his poor investment products, after getting people hooked through his FPU. Ultimately, he is a scam artist.
 
"If someone knows a no risk way of making even 3%, let me know. I don't know of any. That's the rationale as to why others advise people NOT to loan any money to invest in stocks, bonds, real estate, etc."

Borrowing money to be seed for "Investing" can be tricky. However; when the loan you are borrowing, is approximately 1/2% interest rate, it's not hard to find investments that can 100% GUARANTEE BEATING that 1/2 of percent interest on the loan.

If you are really conservative, and afraid of risk, you can get 1.06% interest on CD's at USAA. (That's where the loan is from anyway, so you have an account with them.) In 30 years, $35K will be worth $48K. Not a great return, but something.

You can get plenty of savings rates, at the right banks, that pay close to 2%. My credit union pays 2% on the first $15,000 in the account.

But I also have a lot of faith in the S&P500. Historical evidence proves it in the long term. Yes, investing your own money is hard enough. Borrowing money to invest is worse if you make LESS interest than what you are paying. But a 1/2% interest loan is a horse of a totally different color. The TOTAL INTEREST on the USAA $35K loan, over the 5 years, is $446.80. That's nothing. That's LESS than one of the monthly payments. The only advantage to using the low interest $35K loan, vs investing the $590 monthly, is that you'll be able to invest a larger chunk at one time, and start the money working for you quicker. E.g. Get the loan in the fall; invest $5,500 for that year, and a couple months later, another $5,500 for the following year. Now you have $11,000 working for you almost immediately. Plus, you can put the remainder in 1 year CD's while waiting for the next year to come around.

Anyway; a 1/2% interest loan is not the same as a regular loan when deciding to invest it or not. Plus, I only mentioned ROTH IRA's. Nothing to say you can't also put money in other mutual funds; if you know how to deal with deferring taxes and such.
 
parentalunit2 said:
I’m just speaking from my experience and what I have seen cadets be able to grow this money into over the years. I myself do not ‘save’ money, I invest and build wealth. Now some parents will be able to counsel their progeny on this and others will not. For those who can, they realize the golden opportunity this loan presents for their child.

And please don’t let Dave Ramsey enter into this discussion. He just wants to sell you his poor investment products, after getting people hooked through his FPU. Ultimately, he is a scam artist.
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I'm not suggesting Dave Ramsey is "all telling". Yep, he is in it for the $$'s. But if the bulk of (broke) Americans listened to his common sense approach (radio show only and don't buy a thing from him), they would not be in the broke-bucket that Christcorp laid out above. So while you cannot apply every thing he says to every situation, it's sound advice in most situations. If someone had a guaranteed 2%, then everyone should borrow it at 1/2%. When stocks, and housing are rapidly rising, not-so-smart investors make money. Buying in 2017 has its risks (housing and stocks). So you have to be in the know as to what to do and why. A VC (Venture Capitalist) once told me they bet on 10, 100% sure bets. Only 2 of those 10 pan out. And we all hear about the most brilliant ones. So yes, the USAFA folks who tossed their funds in the market 4-5-6, 7 years ago are looking brilliant. Maybe not so much (or maybe so) for the 2017 pending grads..... With BORROWED money.

Personally, I've always approached investments as follows: if I cannot pee on it, I won't buy it. So I invest in my own small business and in real estate. I was out of RE investing in 2005 because I could not wrap my head around that growth. I dipped my toe back in 2011 and in AZ. But generally speaking, I'm risk adverse unless I really understand what I am investing in; the more I can control the outcome the better. But to each their own. :)

That all said, there will be some who invest their $35K which turns out poorly, and others (like Stealth's son) who parlay it into a paid off home. When he bought, and in his situation, it was a lot of upside and far lower downside. But again, hindsight is always 20-20. He won big! :) Kudos.
 
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parentalunit2 said:
Very much agree with what others have said on here re: investment opportunities for the loan. Dang, if I could borrow that much money at that interest rate, knowing what I know now, I’d jump at it. Take some to set up ‘house’, buy uniforms, etc. but invest the rest! Nobody gets an opportunity like this one in life. Someone upthread said they would not want their kid to start out $35K in debt. If anyone is looking at this as ‘debt’, then they are thinking about this phenomenal opportunity all wrong and do not fully comprehend the time value of money!
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That was me. And I don't care how you look at it, bottom line is this is debt. When you are totaling your assets, this is a debit. A

Yes I get it can be an opportunity for the financially disciplined (you left that part out)...but also a temptation to the average 20 year old Cadet. Sure put the $35k in the bank invest $5k a year into a Roth. So the first year you have $30K just sitting their...tempting you....just a couple hundred this month...that 65" TV sure is nice...then a couple thousand next month..always wanted to go to Hawaii...and so on.

I would wager for every paid off home, there are 100 Corvettes that have depreciated by 50% before the loan was paid off, and another 100 Cadets who have nothing to show for it 10 years out.

I would rather my son not take the loan, but make those "payments" to himself into an IRA, TSP, whatever.
 
Yes, it's a debt. A $90 a YEAR DEBT. "That's how much the entire interest paid on it is".

And you are correct; some people have no business taking it. On the other hand, what better time to learn financial responsibility. You can't be there to teach them. You've done your job. Time to let them move on their own. So, worse case scenario, they take a loan that is AUTOMATICALLY paid back each month. Almost no interest. And a guaranteed job. Sounds like the perfect time to learn about money if you already don't know.

Again too; not everyone takes it to invest with. The purpose of it, and what many use it for, is to set up their first apartment. They use it to buy furniture, clothes, car, (Hopefully modest), etc. And there's nothing that says a person has to take the whole $35. They can take any amount UP TO that.

Also; a cadet has 3 years of "Growing Up" before they can even take the loan. Many young people at the academies do a lot of growing up. They aren't the same as when they went in.

But I totally understand your post. And yes, there are many that probably shouldn't take it. They are financially immature, and they REALLY NEED TO LEARN finances quick. Trust me; that's one thing the military will slam a military member for; and kick them out. "FINANCIAL IRRESPONSIBILITY". Especially an Officer. The only thing I take exception to, is I don't agree that it's a "Temptation to the AVERAGE 20 year old Cadet". A temptation to some? Many? Yes, possibly. But I don't believe to the "Average". From my experience, the "Average" cadet has been quite responsible with the loan. Yes, there are idiots. But that's not the average.
 
Christcorp said:
But I totally understand your post. And yes, there are many that probably shouldn't take it. They are financially immature, and they REALLY NEED TO LEARN finances quick. Trust me; that's one thing the military will slam a military member for; and kick them out. "FINANCIAL IRRESPONSIBILITY". Especially an Officer. The only thing I take exception to, is I don't agree that it's a "Temptation to the AVERAGE 20 year old Cadet". A temptation to some? Many? Yes, possibly. But I don't believe to the "Average". From my experience, the "Average" cadet has been quite responsible with the loan. Yes, there are idiots. But that's not the average.
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Unlike Badfingers valid point, my contention had nothing to do with financially immature people taking out $$'s. One reason the loan is given would be to set yourself up for your 1st apartment (or whatever). I would never advocate taking out a loan to furnish an apartment. Therefore, buying a new Corvette OR buying furniture with borrowed money are in the same (not-so-smart) bucket. Both will plummet in value and you are buying things with money you don't really have (it's the bank's money). Now if you bought a Corvette from an auto auction and you sold it for more money that you paid for it, that is smart because it's a business. Also, if you borrow money for your very 1st modest car, that is understandable. Soon, borrowing money for ANY car isn't smart (unless you have the $$'s in the bank and they give you a 0% loan/lease). Hence, "Dave Ramsey" is spot on most of the time; not a genious, but giving common sense financial advice.

Re: cars. I explained to my children that you need to study the cost of transportation you per month to drive and attempt to minimize that amount within reason. So buying a new can may or maynot be less than buying a used car (there are examples of when it is smarter to buy new versus used assuming people understand what and when to buy). But more often than not, buying a deal on a used car (at wholesale) is smarter. I digress.... But for most furniture, there is Craigslist and borrowing money for that simply isn't smart; ever.

My main point was unless you have a sure bet OR you are starting a business, borrowing money isn't smart even at 0.5% interest. In Stealth's sons situation, he bought a small business (a couple of homes) with impeccable timing that are cash flowing. So every year, he has depreciation that he can write off, he pays less in taxes on the gains, he can write off trips to FL and AZ to check on his property, etc. He had rapid gains which have now mitigated his risk. His risks are mitigated because of the quality of tenants. While that wasn't guaranteed gains on borrowed money, it still was smart as he bought when housing was undervalued and below market (wholesale). So to reiterate, he bought a business (not just a house). Still, there was risk. But investing in a business always has a risk. IMHO, less risk on a material item versus a piece of paper called a stock. That's my view. But there are others who are extremely intuitive (on average) with placing bets on the market. That's not me. But IMHO, NEVER with borrowed money.

If you borrow money to invest in yourself AND in the right degree, that too is acceptable reason to borrow. Our USAFA grad son is at Harvard Medical School. As I discussed and even with the scholarship, normally you need to borrow $$'s in an expensive COL town. It's smarter to borrow 0.5% than a graduate loan of 6.8%.

But to borrow money and invest it into higher yield means there are higher risks with someone else's money that you have to pay back. Like every investment, you need to do a cost benefit analysis. But not with borrowed money. As I said earlier, in 2010, just about everyone who borrowed money at USAA and tossed it into the stock market won. That's called highsight. Let's try that in 2017. The market might go up 25% or get spooked and go down 25% (or??). Now if you have that 2%-3% guaranteed vehicle, go ahead and borrow at 0.5%. It's a forsure bet. As asked earlier, where is that 2-3% guaranteed investment? I don't know of any.

Also, I thought the USAA deal reads that the rate jumps up if you miss a payment. That includes accidents like switching auto deposits, making a mistake transferring $$'s etc. I would not want to lock up my funds on borrowed money if by accident, I didn't make a payment and USAA said "the right is hiked", I'd want the ability to write them out a check to wipe out the debt.
 
I've been investing for many years. And in premise, I agree with what many say here as for "Borrowing" and having "Debt". And I'm definitely not one for borrowing money specifically to invest. That was very popular in the 70's/80's. Back when a savings account easily paid 5%; CD's paying 8%; etc. People thought it was smart to take the equity out of their home and invest it in the market and other places, because the interest made was going to be greater than the interest spent on the loan.

Where I differ here is........ "Not talking semantics or being TECHNICALLY CORRECT"; but I don't really see the $35K as a "LOAN". Because the combined interest over a 5 year period of payback is SO LOW (Less than $500); I see the $35K more as an.......... "ADVANCE ON YOUR PAY".

And unfortunately, there are going to be some people that will need to use some of this $35K for setting up an apartment. You may not think it's smart, but they have very little choice. Granted, a person doesn't need to spend $35K on setting up an apartment, but they will need something. And for multiple reasons, I've seen some cadets get through their 4 years with almost nothing saved. The average cadet should have no problem saving $10,000 in 4 years; that's only $200 per month. After the first year, this isn't difficult. But I have met some cadets, because of family issues, have not received any type of financial support from family at all. They have to pay for their plane fares, clothing, used car and insurance when the time comes, and everything else. Although, these types of people who truly understand the value of a dollar and not having much, usually do quite well at being frugal and saving well. But there are definitely some who will need some money to set up their new life.

As for all the other concerns about "BORROWING" money; that simply doesn't apply in this situation.
1. The rate is so low, it's not really "BORROWING". It's simply an "ADVANCE" on your pay.
2. Even a CD pays back higher interest than what you're paying back. My Credit Union pays 2% interest. So it can be 100% risk free if that's what you want.
3. Unless you get kicked out of the military before your 5 years is up, it is just about IMPOSSIBLE to "Miss a Payment". Your account is going to set up an allotment from your paycheck. You can't miss a payment.
4. Yes, you could be silly and use the money to buy a new car that will depreciate and isn't worth it...... but then again, there's nothing stopping the same individual from not taking the $35K loan, and still having a $500+ car payment on a new car worth the same amount.

Again; you can't look at this as a traditional loan. It's not a signature loan in the normal respect. It's not even an auto or house loan in the normal respect. It's NOT a 2, 3, 4, 5,,,,, 10% loan. And it's not a risk like a traditional loan. Basically, USAA loans the money at this rate because A) They want your business. In order to get the loan, you have to open an account with them. B) You are really low risk. That's why the loan is paid back over 5 years. They know you have a pretty much guaranteed job for 5 years. They are going to get their payment through allotment from your paycheck every month. No chance of you missing a payment unless you PURPOSELY screw up and get kicked out and decide not to pay it back.

If you saved up enough during your cadet years to set up an apartment and you don't need to buy anything; and/or if you are to adverse to risk that you don't want to invest any money for 40 years down the road; then don't take the loan/advance on your pay. No one is twisting your arm. But whether you invest $500 a month through TSP or an IRA or similar, or you do it with a larger initial investment and pay it back monthly, the exact 100% same risk is there. There is absolutely nothing different. It is NO SAFER to invest $500 a month without using the $35K; or using the $35K and paying back the $500+ each month. It's the exact same risk. It's the same risk if you borrow $5k, $10K or whatever to set up an apartment and pay back the $200, $300, etc. per month, or if you live on the floor in a sleeping bag until you've saved for a few months and then bought the furniture.

Again; this can not be looked at like a traditional loan. You can't look at it with the same precautions or concerns. The best way to see it..... "It's an ADVANCE on your paycheck". And there's a big difference between the two. Like I said, I've been investing, saving, borrowing, spending, etc. for about 40 years. I've gotten the knack of it. By the time I turned 50ish, I was 100% debt free. Including no mortgage and having enough money to retire on if I wanted. And not all of it was by investing. Some just good money management. That's with not even buying my first house until I was in my late 30's. (Moving in the military too much). I'd love to have had $35K at basically 0% interest. But I did play catchup compared to civilians who lived and worked in the same town basically forever. I didn't have that, so I invested monthly. Same exact risk factor. Now; had this been a REAL LOAN, with real risks and real interest rates..... I'd be all on board for not even looking at it. But it's not.
 
Christcorp said:
Yes, it's a debt. A $90 a YEAR DEBT. "That's how much the entire interest paid on it is".

Also; a cadet has 3 years of "Growing Up" before they can even take the loan. Many young people at the academies do a lot of growing up. They aren't the same as when they went in.
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Where are you getting the $90 a year/$446 total interest number? Just curious, based on the interest I've already acquired before starting the 5 years.

Picking at one more small point in your post-it's not quite 3 years of growing up. You can take the Navy Fed loan at the end of your 3* year, and they open up the USAA loan early in the fall of your 2* year. Doesn't change any of your advice, really.
 
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.
 
The USAA loan requires 2 things: (1) Direct Deposit of DFAS pay into the USAA account designated for (2) the mandatory EFT monthly loan payment. It's designed that way to minimize any possible disruption due to deployments, moving around to schools, etc.

Most mids and cadets, if they have gotten good financial management training at home and listened to the briefs at school, do conservative things - pay off higher cost debt (credit card, prior student loans for college re-apps, auto loan, etc.), max IRA, set up an emergency fund, earmark funds for the big uniform buy for Marines, start some additional long- term investments, and so on.

I see far fewer Ensign Mobiles parked around the USNA Yard these days. The sponsor mid family has tended toward good used cars or high MPG cars with good cargo room and low maintenance.

The default loan rate is typical of a no-collateral loan, jumping up significantly. USAA also has a long tradition of working with its members on a case basis when those members call with a problem about payment. It can happen - a mid takes the loan and gets medically discharged before graduation, etc.

The loan for a particular class, if I recall correctly, is available for up to one year post-commissioning.

It's a voluntary decision, not a DOD, SA or ROTC program - to each his or her own, according to their personal financial management philosophy and risk management profile.
 
BlahuKahuna said:
Where are you getting the $90 a year/$446 total interest number? Just curious, based on the interest I've already acquired before starting the 5 years.

Picking at one more small point in your post-it's not quite 3 years of growing up. You can take the Navy Fed loan at the end of your 3* year, and they open up the USAA loan early in the fall of your 2* year. Doesn't change any of your advice, really.
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USAA chooses to wait until the 2/c has signed the service obligation papers and fully taken on the commitment. NFCU approaches it differently.
 
Christcorp said:
It is NO SAFER to invest $500 a month without using the $35K
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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).


 
Christcorp said:
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.
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Ah, I see what I missed. The USAA loan is currently up to $36k and 0.75% interest, but again, good advice.
 
Badfinger said:
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).
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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.
 
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Christcorp said:
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.
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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.
 
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