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Investment Ideas for the USAA Career Starter Loan

A few years back both my wife and I took out our USAA Career Starter Loan. I have always been interested in finance and was very excited at the opportunity to invest this money. My wife is not interested in finance at all and also ended up investing her money.

The cool part about this story is that we have both doubled our original $30,000 investments, but we chose very different assets to do so. I chose real estate and ended up buying a rental property with it. Today, my equity in the property is worth over $70K. She chose to invest in index funds (and some stocks) now worth just over $80K.

The takeaway here is that there are a ton of different investment strategies that will allow you to turn this loan into a very large amount of money. The choices my wife and I make reflect our personalities. A rental property is very hands on and I was excited about investing so I enjoyed that aspect. The index funds my wife chose have taken exactly none of her time since she bought them yet she still came out ahead (which I am always reminded of).

This overall passiveness is extremely attractive because you gain all the returns without any headaches associated with managing a property. Today there are even more passive options available then when we invested our loan back in 2015.

If you’re ROTC, Academy or OCS then you will have the opportunity to take a low interest career starter loan. The USAA Career Starter loan provides forward thinking individuals a unique opportunity to invest a large amount of money earlier then most people have the opportunity too. Basically, it is an incredible opportunity to get and stay ahead.

Becoming a Savvy Investor

Other places online may tell you not to invest with borrowed money. In general, this is good advice as most personal loans have interest rates in excess of 10%. Also, you don’t want to risk borrowed money on a penny stock (or single stock) and then have loan payments for the next 5 years on money you’ve lost. However, a savvy investor sees the opportunity to loan such a large amount of money at a low interest rate and invest it to gain much higher returns. By taking advantage of this difference, you can easily have over $60K in assets once you are done paying off the loan.

In order to set yourself up for success down the road, there are three major factors you need to address:

  • Do not lose money. Especially important because this is borrowed money that you make payments on for 5 years-regardless of what you do with it.
  • Keep it simple. Regardless of what service you are, you will have a lot on your plate when you commission. Training pipelines, frequent moves, deployments and long hours are the reality. Active investing strategies such as trading or house flipping require your undivided attention to successfully execute. It is not realistic to expect you will be able to do this while starting your professional career. Building wealth passively will allow you to focus on your busy life and not come home to more work.
  • Keep a long term view. A simple way to think of this is that any money you invest you cannot touch until the loan is paid off. Think about this money as the base of your personal net worth and focus on continuing to contribute to that number every month. If you want to buy a house down the road, using the VA loan will allow you to do so without needing this money as a down payment. We have articles on what it is and how to do that if you’re interested about learning more. Time is on your side with this investment, selling too soon will ensure this money never grows into a life changing amount.

We’ll explore some investment options available and then show example portfolios demonstrating what a $30,000 investment in these options five years ago (our minimum recommended holding period) would be worth today.

Financial Advice

The following content is educational in nature only. Money Gouge is not engaged in soliciting advice of individual investments. Please do your own research and remember that past performance does not guarantee future returns.

Index Funds

The stock market is one of the best ways to increase your wealth passively. You can buy individual stocks or index funds.

Index Funds

A FINANCIAL product that allows you to invest your money across a large amount of individual stocks simultaneously. With index funds you buy a diversifed basket of stocks. Every dolLar you invest is instantly diversified. A COMMON INDEX FUND IS THE S&P 500.

Index funds are popular because their diversification means that your performance is not tied to the fate of just one company. For example, in the early 2000’s both Blockbuster and Netflix were leading entertainment companies. If you had invested $30,000 in either circa 2005 here’s what that would be worth today.

Netflix

$9,291,000

Blockbuster

$0

This is the craziness of investing, it’s very difficult to determine whether a company will be a winner or loser. Putting all your eggs in one basket really sucks if that basket is Blockbuster.

Popular ETF’S/Index Funds

Exchange Traded Funds (ETF’s) are the actual thing you buy in the stock market that allows you to buy an index fund. So if you wanted to buy the S&P 500, you could buy VOO . This is Vanguard’s S&P 500 Index Fund. Vanguard maintains the basket of stocks that is the S&P 500 and buying shares of VOO allows you to buy the S&P 500.

Search results for VOO on Robinhood. Hopefully you have more buying power than me.

Understanding Fees

Companies such as Vanguard maintain these index funds for a super low fee of .10% (or $10/year for every $10,000 invested). It is important to choose the ETF with the lowest fee because they are all offering the same basket of stocks and a higher fee will drag on your returns. For comparison, a 1% fee on $10,000 over 10 years will cost you over $2,000 whereas the .10% would be $200.

S&P 500

The Standard and Poors 500 index (S&P 500) is the 500 most valuable companies by market cap. This index is extremely popular because it basically represent the 500 most successful companies currently on the market. It is relatively safe because you own all 500 and are not tied to the performance of any individual one.

If one company begins to struggle, it will be kicked off the S&P index and another rising company will take its place. This happened in December of 2020 when Tesla (TSLA) joined the S&P 500 and replaced a company called Apartment Investment and Management (AIV). AIV was not struggling and has done well since being kicked off, but Tesla has become such a successful company that it was added. Successful companies will naturally find their way in to the S&P 500 so when you buy it, you will automatically be holding quality stocks.

ETF’S to buy the S&P 500:

  • Vanguard S&P500 Index (VOO)- Expense ratio .03%
  • SPDR S&P 500 ETF (SPY)- Expense ratio .0945%
  • Ishares Core S&P 500 ETF (IVV)- Expense ratio .03%

The five year return of the S&P 500 is an awesome 17.6%. So, if you had invested $30,000 in 2016 and not touched it you would have $67,477 today.

$30,000 invested in the S&P500 5 years ago. Source: Investor.gov

Total Stock Market

The total stock market index is the ultimate diversification tool. When you buy this index fund, every dollar is diversified throughout the entire stock market. This is done by dividing the entire stock market into sections based on the market capitalization (or value) of a company. There are five categories (Mega,Large,Mid, Mid-Small and Micro). This index is evenly weighted between all sizes. The advantage of this (vice the S&P 500) is that you gain exposure to small cap stocks which traditionally grow faster than large caps. The extensive diversification of this index makes it one of the most popular in the financial independence world.

ETF’s to buy the total stock market:

  • Vanguard Total Stock Market ETF (VTI)- Expense ratio .03%
  • Ishares Core Total US Stock Market (ITOT)- Expense ratio .03%

The five year return of VTI is 17.39%. So if you used your loan to invest $30,000 five years ago it would be worth $66,877.00 today.

$30,000 invested in the Total Market Index 5 years ago. Source Investor.gov

Information Technology Index

This index consist of a basket of high quality tech stocks. Big companies like Microsoft and Apple as well as quickly growing companies such as Square and NVIDIA are all included. As you can probably guess, this index has been absolutely crushing it over the last few years. It’s five year return is 31.55%. So, if you invested $30,000 in 2016 you would have $118,188.55 today.

$30,000 invested in the Technology Index 5 years ago. Source: Investor.gov

How to Buy Index Funds with your Career Starter Loan

Buying an index fund (or stock) is simple, open a brokerage account. A brokerage account is an account used to buy stocks and ETF’s. You are likely familiar with Robinhood and may already have one. Robinhood is the most well known brokerage account but it is not the only one that offers an awesome product. It’s user friendly interface makes your stocks easily accessible, this can be a dangerous thing when you’re trying to not touch your money. For the career starter loan investment you may also want to consider M1 finance. Here’s why:

  • M1 Finance will allow you to build a portfolio. Say you wanted to split your investment between VTI,VGT and VOO but wanted to weight more heavily in technology. You could set VTI and VOO to 20% each and VGT to 60%. M1 will automatically divide every investment between them with no math on your part. Robinhood will not do this. If you wanted to add some individual stocks to your investment, this is also the simplest way to do that.
  • It offers a $30 sign up bonus, which is more than Robinhood. The sign up stocks I have gotten from them have never been worth more than $10. If you really wanted to max out your benefits, sign up for Robinhood (free stock) and transfer to M1 to get a $30 bonus. If you already have a Robinhood you could also do this.
An example portfolio for your career starter loan.

M1 Finance

  • No cost for buying stocks/etf’s
  • Dividend Reinvestment
  • Fractional Shares
  • $30 Sign On Bonus
  • Portfolio Style Investing

Robinhood

  • No cost for buying stocks/etf’s
  • Dividend Reinvestment
  • Fractional Shares
  • Free Stock
  • Portfolio Style Investing

If you are interested in reading more about different brokerage accounts check out our article on that.

Buying Index Funds through a Roth IRA

If you’re comfortable with not touching your money until you are 59 1/2, then you can use the Career Starter Loan to make one of the best financial moves possible. A Roth IRA is an individual retirement account where all the investments are tax free for life. The catch is that you cannot touch the money until you’re 59 1/2. Roth is one type of IRA, the other is traditional. A quick look at the two:

Roth

  • Max Annual Contribution: $6,000
  • Annual Contribution is deducted from your taxable salary for this year
  • Annual Contribution is tax free for life

Traditional

  • Max Annual Contribution: $6,000
  • Annual Contribution is deducted from your taxable salary for this year
  • Annual Contribution is tax free for life

Money Gouge Tip

Do not invest in a traditional retirement account with the career starter loan. You will not save much money because your taxable income is already extremely low. It will save you a lot more to not pay taxes on what your investment grows to by the time you are 59 1/2.

How To Buy Index Funds Through an IRA

The max annual contribution to a Roth IRA is $6000. If you take the Career Starter loan in 2021 then you can invest $6000 right away and another $6000 on January 1st 2022. If you plan on investing more than that overall (it’s smart to invest as much as you can) then you can go ahead and invest the additional money in a normal brokerage account.

To open a Roth you will need to use either M1 finance or a traditional brokerage such as Vanguard. At this time, Robinhood does not offer IRA’s. You can sign up for an M1 IRA here.

The biggest difference between a regular brokerage and Roth IRA for M1 is that the Roth requires a $500 minimum to open. That shouldn’t have much of an effect since the goal is to max it out ($6,000).

Vanguard is also popular, and you can check out their IRA account here. For me, I would prefer M1 over Vanguard because of it’s significantly better user interface and no commissions. Vanguard will charge you a commission (fee) to buy anything other than their index funds. You can buy anything for free on platforms such as Robinhood or M1 so it really does not make sense to pay this.

Money Gouge Tip

Purchasing index funds through an IRA does not mean you have to change your overall allocation. Basically, you’re buying the same stuff but in different accounts. The intention is to buy as much as possible ($12,000 in two $6,000 increments) in Roth so that it grows tax free for life. The rest of the investment can be in a normal brokerage and on platforms like fundrise which we will discuss later.

If you’re interested in learning more about setting up your TSP in the future or retirement accounts in general check out our article on that. Keep in mind that using your Career Starter Loan to invest in an IRA has no impact on your TSP. You will still need to focus on that when you commission. See more here.

Beyond Index Funds

It is okay to buy a small amount of individual stocks alongside index funds. The two major considerations are:

  • How much of your overall investment can be used for individual stocks?
  • What stocks are appropriate?

Overall Amount

While the majority of your overall investment should be index funds, one of the minor allocations can be individual stocks. The other minor allocation is real estate (more on that later).

A 10-15% allocation of the entire investment amount is appropriate. This will give you a decently sized position without taking too many dollars from your main investment in index funds.

If you are not interested in investing and don’t have any companies in mind then you do not have to allocate anything towards individual stocks.

What stocks are appropriate?

The stocks you buy are much more important than the amount. In general 1 or 2 high quality companies should be sufficient. This will allow you to build a larger position instead of a ton of small positions in a bunch of companies (which you are already accomplishing with index funds).

A high quality company is a well established and profitable brand. If there is a company you like or have always been interested in investing in: this is the time to do so. It helps if you view your investment as becoming an owner of the company.

What companies are you interested in becoming an owner of?

A 10% allocation on $30K would be a $3000 investment; here’s what that looks like in a few high quality companies if you had done that 5 years ago.

Equally important is what you should not invest in. Speculative or volatile investments are best avoided when using this loan. That includes:

  • Crypto
  • Penny Stocks
  • Companies you know nothing about or have never heard of

Remember the goal is to invest in assets that will grow over the long term. The volatility of these above investment puts you at real risk of losing borrowed money. The next asset is both non volatile and historically profitable over the long term.

Beyond the Stock Market

Did you know that including real estate in your portfolio reduces volatility and can increase overall return? This is because real estate’s performance has a low correlation to the stock markets performance. Therefore it is naturally insulated from a drop in the stock market. It also pays dividends providing a stable passive income.

Advantages of Real Estate

Diversification Away from Stock Market

Passive Dividend Income

This fact is well known by professional investors and can be seen by the asset allocation in the Yale and Stanford endowment funds. Both are legendary in the investment world because they have achieved market beating returns over the long term.

9.5%

Yale endowment fund allocation in real estate.

8%

Stanford endowment fund allocation in real estate.

You can also achieve less volatility and better overall performance by allocating 10% of your investment in real estate. One common way is to use Real Estate Investment Trust (REIT’S).

Source: Investor.gov

Public REIT’s

There are a ton of REIT’s (300+) available on the market. One of the most popular ways to buy REIT’s is the Vanguard Real Estate Trust (VNQ). This is an index fund of high quality REIT’s. It has an average 5 year return of 8.38%. It’s dividend yield is currently 2.83%.

VNQ on Robinhood

But there’s a problem with publicly traded REIT’s.

Public REIT’s trade on the stock market so their price is affected by overall market movements. Therefore, they are still correlated to market performance (even if the underlying business is not impacted). This negates one of the benefits of investing in real estate. VNQ fell in early 2020 alongside the rest of the market.

When Yale and Stanford invest in real estate they buy apartment buildings (and other large commercial buildings) directly because they have that type of money. Owning real estate like this is how you maximize your diversification because these buildings are valuable and cash flowing regardless of the stock market.

Fortunately, there is a way for you to mimic this (without having millions of dollars) and buy a collection of professionally vetted rental properties. Unfortunately, I did not know about Fundrise when I took my career starter loan but I have since invested with them and done well.

Fundrise

Basically, Fundrise allows everyday investors to invest in real estate in the same way as professionals do. It made real estate a lot more approachable and a lot less complicated.

Fundrise has paid around 100M in dividends to shareholders. Source: fundrise.com

Fundrise allows you to buy shares of quality investment properties. These shares allow you to become a direct owner of the properties. This allows you to truly diversify without a lot of the complexity usually involved with real estate.

How does Fundrise perform?

Here are the numbers from their various funds (portfolios). For reference, we’ll include VNQ’s performance as well.

Income REIT

  • Dividend: 6.97%
  • Average 5 year return: 8.6%
  • Value of $3k investment made in 2016: $4,531

Growth REIT

  • Dividend: 3.02%
  • Average 5 year return: 12.98%
  • Value of $3k investment made in 2016: $5,522

VNQ

  • Dividend: 2.83%
  • Average 5 year return: 8.38%
  • Value of $3k investment made in 2016: $4,486

The numbers don’t lie, an investment in either of their funds has performed well over the last five years. The best part is that this is passive and does not involve the stock market. Although stocks have done well over the last five years, diversification will pay off if the next five years are different.

Fundrise

An awesome new platform that allows you buy shares of professionally vetted investment real estate.

Putting it All Together

Let’s walkthrough a couple $30k portfolios that demonstrate how you could invest a career starter loan. We’ll breakdown the allocations and what they would be worth if you had invested in them 5 years ago and not touched them.

Portfolio 1

Portfolio 2

In just five years, your career starter loan could build you serious wealth. My wife and I both experienced this. If you are still unsure of how much of your loan to invest we discuss that in more detail here. Basically, invest what you can: the more the better. The best part? Investing this loan takes about 30 minutes of your time. This is a lot better than time consuming strategies that will probably flop (such as trading).

The Career Starter loan is an awesome opportunity. Invest what you can and then shift your focus to paying the loan off.

Money Gouge

Two military guys helping you make better financial decisions and understand how money works.
Learn More, Earn More

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The Best Way to Use the $200 American Express Travel Credit

American Express has been on a streak adding new benefits to their flagship Platinum card. Their latest addition is a $200 travel credit. This is on top of the $400 in offers that were released last month and in addition to their airline credit.

What: $200 Travel Credit for travel booked through AmexTravel.com. Includes airfare, hotel, cruises, car rentals and tours.

When: Usable through December 31st, 2021

AmexTravel usually has pretty standard rates for plane tickets and most fares. Whatever you book through them will now be $200 off and have a guaranteed refund if you need to cancel. That being said, there are some ways you can make that money go even further.

Note

Amex is running two types of promotions on plane tickets: Insider Fare and Recommended Flights. Though you will save $200 overall with the travel credit, I could not find any fares that were cheaper than google flights. In addition, Insider Fare is denominated in points (though they are decent) so the credit does not apply.

The Fine Hotel and Resort Collection

Amex Platinum members can get insane offerings at awesome hotels in popular spots by booking through the Fine Hotel and Resort Collection. Let’s look at a few different locations over a theoretical one night stay (29-30 May) over Memorial Day weekend:

Washington DC

The Jefferson

Their Website : $580/night
AmexTravel $530/night

The booking is cheaper through the Hotel and Resorts collection. Keep in mind, this is not including the $200 credit you will receive off the price. The booking also includes:

  • $100 Food and Drink Credit within the hotel
  • Daily breakfast for two
  • If available, room upgrade upon arrival
  • Guaranteed 4pm late checkout
  • Early check in at noon

San Diego

Four Seasons

Their Website $350/night


AmexTravel $350/night
  • $150 for the first night after credit
  • $100 property credit. Good for spa as well as food and drinks.
  • 4pm late checkout
  • Early check in
  • Room upgrade when available

Amex was also running a deal for this hotel where you book two nights and get a third one complimentary. These are constantly changing but most locations had at least one place offering this from what I’ve seen.

Money Gouge Tip: Ritz Carlton

Do not use Amex travel for the Ritz Carlton if you are in the military. They have a much more lucrative deal for military which you can read about here.

Final Thoughts

American Express continues to impress with their Platinum card. If you are curious about some of the other great benefits you can check them out here. This $200 credit is a way to make the card more useful in a COVID world; although it’s still not as good as the $300 travel credit on the Chase Sapphire Reserve that can be used for almost anything. Plane tickets and cruises might be hard to book for a while but you do have until the end of the year. Ultimately, the best way to use this credit is to combine it with the perks of the Fine Resorts and Hotels Collection. Combining these allows you to have an amazing weekend in a 5 star hotel without paying 5 star prices.

Written by: Dan Tapia

Investment Ideas for the Navy Federal Career Starter Loan

A few years back both my wife and I took out our Career Starter Loan. I have always been interested in finance and was very excited at the opportunity to invest this money. My wife is not interested in finance at all and also ended up investing her money.

The cool part about this story is that we have both doubled our original $30,000 investments, but we chose very different assets to do so. I chose real estate and ended up buying a rental property with it. Today, my equity in the property is worth over $70K. She chose to invest in index funds (and some stocks) now worth just over $80K.

The takeaway here is that there are a ton of different investment strategies that will allow you to turn this loan into a very large amount of money. The choices my wife and I make reflect our personalities. A rental property is very hands on and I was excited about investing so I enjoyed that aspect. The index funds my wife chose have taken exactly none of her time since she bought them yet she still came out ahead (which I am always reminded of).

This overall passiveness is extremely attractive because you gain all the returns without any headaches associated with managing a property. Today there are even more passive options available then when we invested our loan back in 2015.

If you’re ROTC, Academy or OCS then you will have the opportunity to take a low interest career starter loan. The Navy Federal Career Starter loan provides forward thinking individuals a unique opportunity to invest a large amount of money earlier then most people have the opportunity too. Basically, it is an incredible opportunity to get and stay ahead.

Becoming a Savvy Investor

Other places online may tell you not to invest with borrowed money. In general, this is good advice as most personal loans have interest rates in excess of 10%. Also, you don’t want to risk borrowed money on a penny stock (or single stock) and then have loan payments for the next 5 years on money you’ve lost. However, a savvy investor sees the opportunity to loan such a large amount of money at a low interest rate and invest it to gain much higher returns. By taking advantage of this difference, you can easily have over $60K in assets once you are done paying off the loan.

In order to set yourself up for success down the road, there are three major factors you need to address:

  • Do not lose money. Especially important because this is borrowed money that you make payments on for 5 years-regardless of what you do with it.
  • Keep it simple. Regardless of what service you are, you will have a lot on your plate when you commission. Training pipelines, frequent moves, deployments and long hours are the reality. Active investing strategies such as trading or house flipping require your undivided attention to successfully execute. It is not realistic to expect you will be able to do this while starting your professional career. Building wealth passively will allow you to focus on your busy life and not come home to more work.
  • Keep a long term view. A simple way to think of this is that any money you invest you cannot touch until the loan is paid off. Think about this money as the base of your personal net worth and focus on continuing to contribute to that number every month. If you want to buy a house down the road, using the VA loan will allow you to do so without needing this money as a down payment. We have articles on what it is and how to do that if you’re interested about learning more. Time is on your side with this investment, selling too soon will ensure this money never grows into a life changing amount.

We’ll explore some investment options available and then show example portfolios demonstrating what a $30,000 investment in these options five years ago (our minimum recommended holding period) would be worth today.

Financial Advice

The following content is educational in nature only. Money Gouge is not engaged in soliciting advice of individual investments. Please do your own research and remember that past performance does not guarantee future returns.

Index Funds

The stock market is one of the best ways to increase your wealth passively. You can buy individual stocks or index funds.

Index Funds

A FINANCIAL product that allows you to invest your money across a large amount of individual stocks simultaneously. With index funds you buy a diversifed basket of stocks. Every dolLar you invest is instantly diversified. A COMMON INDEX FUND IS THE S&P 500.

Index funds are popular because their diversification means that your performance is not tied to the fate of just one company. For example, in the early 2000’s both Blockbuster and Netflix were leading entertainment companies. If you had invested $30,000 in either circa 2005 here’s what that would be worth today.

Netflix

$9,291,000

Blockbuster

$0

This is the craziness of investing, it’s very difficult to determine whether a company will be a winner or loser. Putting all your eggs in one basket really sucks if that basket is Blockbuster.

Popular ETF’S/Index Funds

Exchange Traded Funds (ETF’s) are the actual thing you buy in the stock market that allows you to buy an index fund. So if you wanted to buy the S&P 500, you could buy VOO . This is Vanguard’s S&P 500 Index Fund. Vanguard maintains the basket of stocks that is the S&P 500 and buying shares of VOO allows you to buy the S&P 500.

Search results for VOO on Robinhood. Hopefully you have more buying power than me.

Understanding Fees

Companies such as Vanguard maintain these index funds for a super low fee of .10% (or $10/year for every $10,000 invested). It is important to choose the ETF with the lowest fee because they are all offering the same basket of stocks and a higher fee will drag on your returns. For comparison, a 1% fee on $10,000 over 10 years will cost you over $2,000 whereas the .10% would be $200.

S&P 500

The Standard and Poors 500 index (S&P 500) is the 500 most valuable companies by market cap. This index is extremely popular because it basically represent the 500 most successful companies currently on the market. It is relatively safe because you own all 500 and are not tied to the performance of any individual one.

If one company begins to struggle, it will be kicked off the S&P index and another rising company will take its place. This happened in December of 2020 when Tesla (TSLA) joined the S&P 500 and replaced a company called Apartment Investment and Management (AIV). AIV was not struggling and has done well since being kicked off, but Tesla has become such a successful company that it was added. Successful companies will naturally find their way in to the S&P 500 so when you buy it, you will automatically be holding quality stocks.

ETF’S to buy the S&P 500:

  • Vanguard S&P500 Index (VOO)- Expense ratio .03%
  • SPDR S&P 500 ETF (SPY)- Expense ratio .0945%
  • Ishares Core S&P 500 ETF (IVV)- Expense ratio .03%

The five year return of the S&P 500 is an awesome 17.6%. So, if you had invested $30,000 in 2016 and not touched it you would have $67,477 today.

$30,000 invested in the S&P500 5 years ago. Source: Investor.gov

Total Stock Market

The total stock market index is the ultimate diversification tool. When you buy this index fund, every dollar is diversified throughout the entire stock market. This is done by dividing the entire stock market into sections based on the market capitalization (or value) of a company. There are five categories (Mega,Large,Mid, Mid-Small and Micro). This index is evenly weighted between all sizes. The advantage of this (vice the S&P 500) is that you gain exposure to small cap stocks which traditionally grow faster than large caps. The extensive diversification of this index makes it one of the most popular in the financial independence world.

ETF’s to buy the total stock market:

  • Vanguard Total Stock Market ETF (VTI)- Expense ratio .03%
  • Ishares Core Total US Stock Market (ITOT)- Expense ratio .03%

The five year return of VTI is 17.39%. So if you used your loan to invest $30,000 five years ago it would be worth $66,877.00 today.

$30,000 invested in the Total Market Index 5 years ago. Source Investor.gov

Information Technology Index

This index consist of a basket of high quality tech stocks. Big companies like Microsoft and Apple as well as quickly growing companies such as Square and NVIDIA are all included. As you can probably guess, this index has been absolutely crushing it over the last few years. It’s five year return is 31.55%. So, if you invested $30,000 in 2016 you would have $118,188.55 today.

$30,000 invested in the Technology Index 5 years ago. Source: Investor.gov

How to Buy Index Funds with your Career Starter Loan

Buying an index fund (or stock) is simple, open a brokerage account. A brokerage account is an account used to buy stocks and ETF’s. You are likely familiar with Robinhood and may already have one. Robinhood is the most well known brokerage account but it is not the only one that offers an awesome product. It’s user friendly interface makes your stocks easily accessible, this can be a dangerous thing when you’re trying to not touch your money. For the career starter loan investment you may also want to consider M1 finance. Here’s why:

  • M1 Finance will allow you to build a portfolio. Say you wanted to split your investment between VTI,VGT and VOO but wanted to weight more heavily in technology. You could set VTI and VOO to 20% each and VGT to 60%. M1 will automatically divide every investment between them with no math on your part. Robinhood will not do this. If you wanted to add some individual stocks to your investment, this is also the simplest way to do that.
  • It offers a $30 sign up bonus, which is more than Robinhood. The sign up stocks I have gotten from them have never been worth more than $10. If you really wanted to max out your benefits, sign up for Robinhood (free stock) and transfer to M1 to get a $30 bonus. If you already have a Robinhood you could also do this.
An example portfolio for your career starter loan.

M1 Finance

  • No cost for buying stocks/etf’s
  • Dividend Reinvestment
  • Fractional Shares
  • $30 Sign On Bonus
  • Portfolio Style Investing

Robinhood

  • No cost for buying stocks/etf’s
  • Dividend Reinvestment
  • Fractional Shares
  • Free Stock
  • Portfolio Style Investing

If you are interested in reading more about different brokerage accounts check out our article on that.

Buying Index Funds through a Roth IRA

If you’re comfortable with not touching your money until you are 59 1/2, then you can use the Career Starter Loan to make one of the best financial moves possible. A Roth IRA is an individual retirement account where all the investments are tax free for life. The catch is that you cannot touch the money until you’re 59 1/2. Roth is one type of IRA, the other is traditional. A quick look at the two:

Roth

  • Max Annual Contribution: $6,000
  • Annual Contribution is deducted from your taxable salary for this year
  • Annual Contribution is tax free for life

Traditional

  • Max Annual Contribution: $6,000
  • Annual Contribution is deducted from your taxable salary for this year
  • Annual Contribution is tax free for life

Money Gouge Tip

Do not invest in a traditional retirement account with the career starter loan. You will not save much money because your taxable income is already extremely low. It will save you a lot more to not pay taxes on what your investment grows to by the time you are 59 1/2.

How To Buy Index Funds Through an IRA

The max annual contribution to a Roth IRA is $6000. If you take the Career Starter loan in 2021 then you can invest $6000 right away and another $6000 on January 1st 2022. If you plan on investing more than that overall (it’s smart to invest as much as you can) then you can go ahead and invest the additional money in a normal brokerage account.

To open a Roth you will need to use either M1 finance or a traditional brokerage such as Vanguard. At this time, Robinhood does not offer IRA’s. You can sign up for an M1 IRA here.

The biggest difference between a regular brokerage and Roth IRA for M1 is that the Roth requires a $500 minimum to open. That shouldn’t have much of an effect since the goal is to max it out ($6,000).

Vanguard is also popular, and you can check out their IRA account here. For me, I would prefer M1 over Vanguard because of it’s significantly better user interface and no commissions. Vanguard will charge you a commission (fee) to buy anything other than their index funds. You can buy anything for free on platforms such as Robinhood or M1 so it really does not make sense to pay this.

Money Gouge Tip

Purchasing index funds through an IRA does not mean you have to change your overall allocation. Basically, you’re buying the same stuff but in different accounts. The intention is to buy as much as possible ($12,000 in two $6,000 increments) in Roth so that it grows tax free for life. The rest of the investment can be in a normal brokerage and on platforms like fundrise which we will discuss later.

If you’re interested in learning more about setting up your TSP in the future or retirement accounts in general check out our article on that. Keep in mind that using your Career Starter Loan to invest in an IRA has no impact on your TSP. You will still need to focus on that when you commission. See more here.

Beyond Index Funds

It is okay to buy a small amount of individual stocks alongside index funds. The two major considerations are:

  • How much of your overall investment can be used for individual stocks?
  • What stocks are appropriate?

Overall Amount

While the majority of your overall investment should be index funds, one of the minor allocations can be individual stocks. The other minor allocation is real estate (more on that later).

A 10-15% allocation of the entire investment amount is appropriate. This will give you a decently sized position without taking too many dollars from your main investment in index funds.

If you are not interested in investing and don’t have any companies in mind then you do not have to allocate anything towards individual stocks.

What stocks are appropriate?

The stocks you buy are much more important than the amount. In general 1 or 2 high quality companies should be sufficient. This will allow you to build a larger position instead of a ton of small positions in a bunch of companies (which you are already accomplishing with index funds).

A high quality company is a well established and profitable brand. If there is a company you like or have always been interested in investing in: this is the time to do so. It helps if you view your investment as becoming an owner of the company.

What companies are you interested in becoming an owner of?

A 10% allocation on $30K would be a $3000 investment; here’s what that looks like in a few high quality companies if you had done that 5 years ago.

Equally important is what you should not invest in. Speculative or volatile investments are best avoided when using this loan. That includes:

  • Crypto
  • Penny Stocks
  • Companies you know nothing about or have never heard of

Remember the goal is to invest in assets that will grow over the long term. The volatility of these above investment puts you at real risk of losing borrowed money. The next asset is both non volatile and historically profitable over the long term.

Beyond the Stock Market

Did you know that including real estate in your portfolio reduces volatility and can increase overall return? This is because real estate’s performance has a low correlation to the stock markets performance. Therefore it is naturally insulated from a drop in the stock market. It also pays dividends providing a stable passive income.

Advantages of Real Estate

Diversification Away from Stock Market

Passive Dividend Income

This fact is well known by professional investors and can be seen by the asset allocation in the Yale and Stanford endowment funds. Both are legendary in the investment world because they have achieved market beating returns over the long term.

9.5%

Yale endowment fund allocation in real estate.

8%

Stanford endowment fund allocation in real estate.

You can also achieve less volatility and better overall performance by allocating 10% of your investment in real estate. One common way is to use Real Estate Investment Trust (REIT’S).

Source: Investor.gov

Public REIT’s

There are a ton of REIT’s (300+) available on the market. One of the most popular ways to buy REIT’s is the Vanguard Real Estate Trust (VNQ). This is an index fund of high quality REIT’s. It has an average 5 year return of 8.38%. It’s dividend yield is currently 2.83%.

VNQ on Robinhood

But there’s a problem with publicly traded REIT’s.

Public REIT’s trade on the stock market so their price is affected by overall market movements. Therefore, they are still correlated to market performance (even if the underlying business is not impacted). This negates one of the benefits of investing in real estate. VNQ fell in early 2020 alongside the rest of the market.

When Yale and Stanford invest in real estate they buy apartment buildings (and other large commercial buildings) directly because they have that type of money. Owning real estate like this is how you maximize your diversification because these buildings are valuable and cash flowing regardless of the stock market.

Fortunately, there is a way for you to mimic this (without having millions of dollars) and buy a collection of professionally vetted rental properties. Unfortunately, I did not know about Fundrise when I took my career starter loan but I have since invested with them and done well.

Fundrise

Basically, Fundrise allows everyday investors to invest in real estate in the same way as professionals do. It made real estate a lot more approachable and a lot less complicated.

Fundrise has paid around 100M in dividends to shareholders. Source: fundrise.com

Fundrise allows you to buy shares of quality investment properties. These shares allow you to become a direct owner of the properties. This allows you to truly diversify without a lot of the complexity usually involved with real estate.

How does Fundrise perform?

Here are the numbers from their various funds (portfolios). For reference, we’ll include VNQ’s performance as well.

Income REIT

  • Dividend: 6.97%
  • Average 5 year return: 8.6%
  • Value of $3k investment made in 2016: $4,531

Growth REIT

  • Dividend: 3.02%
  • Average 5 year return: 12.98%
  • Value of $3k investment made in 2016: $5,522

VNQ

  • Dividend: 2.83%
  • Average 5 year return: 8.38%
  • Value of $3k investment made in 2016: $4,486

The numbers don’t lie, an investment in either of their funds has performed well over the last five years. The best part is that this is passive and does not involve the stock market. Although stocks have done well over the last five years, diversification will pay off if the next five years are different.

Fundrise

An awesome new platform that allows you buy shares of professionally vetted investment real estate.

Putting it All Together

Let’s walkthrough a couple $30k portfolios that demonstrate how you could invest a career starter loan. We’ll breakdown the allocations and what they would be worth if you had invested in them 5 years ago and not touched them.

Portfolio 1

Portfolio 2

In just five years, your career starter loan could build you serious wealth. My wife and I both experienced this. If you are still unsure of how much of your loan to invest we discuss that in more detail here. Basically, invest what you can: the more the better. The best part? Investing this loan takes about 30 minutes of your time. This is a lot better than time consuming strategies that will probably flop (such as trading).

The Career Starter loan is an awesome opportunity. Invest what you can and then shift your focus to paying the loan off.

Money Gouge

Two military guys helping you make better financial decisions and understand how money works.
Learn More, Earn More

Affiliate Links

This article contains affiliate links. Using the links may result in us being compensated by our partners at no cost to you. We do not recommend products we do not know and use ourselves. Articles like the one you are reading can take between 10-20 hours to write and edit. If you like our content and are interested in a product, please consider supporting us by using these links to sign up for our partners.

How Your Credit Score is Broken Down

Credit scores are important. They’re also boring. And complicated.

This is an ad-free guide that tells us everything we need to know without wasting our time. If you already have a good handle on credit scores, consider bookmarking this page for anyone you know (or work with) who doesn’t.

Contents

  1. What is a Credit Score?
  2. Where Does it Come From?
  3. How is it Calculated?
  4. What’s a Good Credit Score?

What is a Credit Score?

Your credit score is a three digit number used by lenders and many other institutions to gauge how much they can trust you to pay back debts, loans, or any other type of financial obligation. Similar to your service’s fitness test score, it’s a common metric used by institutions to understand your capabilities. The model isn’t perfect, and maybe it doesn’t even measure the things we think are important. That said, if we’re in bad shape physically or financially, it’s a simple fact that our score will suffer. The difference is that while our fitness score might not affect our day to day lives much, our credit scores can.

Where Does it Come From?

Short Answer:

Credit bureaus keep credit reports on each of us based on our credit history. Credit reporting companies (different than the bureaus) generate our credit scores based off of the credit reports they get from the bureaus.

Better Answer:

Credit scores are generated by Fair Isaac Corporation (FICO), VantageScore, or other third-party companies and can be given to potential lenders when somebody applies for anything from a phone to a loan. The information used to generate this score comes from credit reports, which are kept by the three primary credit bureaus: Experian, Equifax, and TransUnion. These three bureaus each have their own way of organizing and presenting a credit report, but they all have the same basic elements:

  • Credit Usage
  • Credit History
  • Credit Inquiries
  • Public Records (Involving loan delinquency etc.)

If you’re in the military, pay your utility bills on time, and have so far avoided bankruptcy, chances are you don’t need to worry about public records. If you struggle to do those things, we get it. Start here, and come back to this page later. 

How is it Calculated?

According to FICO and conventional wisdom, roughly 90% of lenders use a FICO score when an individual applies for credit. Here’s how a FICO score is calculated:

Payment History: 35 %

How you’ve paid your bills in the past is the biggest component of your credit score, and it’s not hard to understand why. If you’re applying for a mortgage, car loan, or even just a credit card, lenders want to know that you’ve paid your bills on time in the past. Any credit payment- good or bad- from the past several years (typically seven) shows up in this category, whether it’s a $125 monthly credit card minimum or a $3,500 mortgage payment.

Every time you make a payment on time, your payment history is better for it. Every time you miss one, it suffers. This is the easiest category to mess up. It’s also the easiest one to never get hit on simply by setting all accounts up with autopay. More on that to follow.

Amounts Owed: 30 %

Every account you owe money on falls into the “Amounts Owed” category of your FICO score. The vast majority of accounts that show up on a credit report are either installment loans or revolving accounts. Installment loans are a one time loan given to you, then paid back on a predetermined schedule like an auto loan, mortgage, or career starter loan. A revolving account is an account that sets a limit on how much you’re able to charge to the account and comes with terms and conditions that dictate how you must pay the debt off. The most common example is a credit card, say with a $75 or 2% monthly minimum payment requirement and 15% APR.

While it’s important for you personally to know how much you still owe on your car, home, career starter loan, or other types of installment accounts so you can plan properly and avoid overextending yourself, your credit score is affected much more by your revolving accounts than your installment loans. Specifically, the most important part of your “Amounts Owed” is your Credit Utilization Ratio

Utilization Ratio

Utilization Ratio is a measure of what portion of your credit limit you are using. To find yours, divide the total of your credit card balances by the total of your credit limits, and multiply by 100. For example, let’s say you’ve got two American Express Cards and one Navy Federal Card with the balances and limits below. 

CardBalanceLimit
AMEX 1$2,500$6,000
AMEX 2$1,000$8,000
Navy Fed 1$2,000$5,000
Example Credit Utilization Ratio (Math Below)

If you don’t like math, we get it. Use Credit Karma to calculate your utilization ratio and monitor every other aspect of your credit if you’re curious.

The standard number to shoot for is 30% or less, but as always it’s best to automate your credit card payments in full and avoid carrying a balance from month to month. This will not only minimize your credit utilization ratio while simultaneously boosting your payment history (the two best things you can do for your credit score), it will also protect you from racking up more debt while being victim to the powers of your credit card’s APR.

Length of Credit History: 15%

The age of your accounts is the next largest component of your credit score. The older, the better… especially if you have a good payment history and a low credit utilization ratio. According to FICO, there are a number of ways the age of your accounts are used to calculate this component of your score, including average age, oldest and youngest ages of accounts, and when the last time your accounts have been used. This is something to think about when considering whether to consolidate your debt or close credit cards you’re not using. If you’re thinking about doing either of those things, chances are you’re working towards paying off all of your damaging debt, and you should absolutely do it. If you’re doing it for perceived convenience or because you simply haven’t used the credit card your parents wisely opened for you when you were 17, realize that your credit score can take a slight hit for a couple of months when you close out old accounts.

If you have no credit history whatsoever, fear not. You’re probably in a great spot because you’re not in crippling debt and you can guarantee a nearly perfect credit history starting as soon as you choose to begin.

Credit Mix: 10%

Just as diversification is good for your portfolio, it’s good for your credit score too. Though it comprises only 10% of your credit score, a good credit mix can give it a boost that might make all the difference. The essence of what creditors like to see here is a mix of installment and revolving credit accounts (and success paying your bills on time in these different accounts). For example, good payment history on two or three different credit cards, an auto loan, a personal installment loan (such as the Career Starter Loan), and a mortgage gives creditors confidence that you’re able to manage different types of credit accounts responsibly. For the most part, credit mix takes care of itself for those who choose credit cards wisely and buy cars and homes they can afford. 

New Credit: 10%

Opening a large number of new accounts in a short time period is understandably alarming to potential lenders. There’s not a ton to consider here beyond the basic understanding that a large number of new accounts in a short time span can hurt your credit.

What’s a Good Score?

The diagram to the right tells us just about everything we need to know. Ideally, we’d all be in the “Very Good” or “Exceptional” categories. As we’ve seen, higher credit scores provide you more opportunities, better access to exclusive offers from a variety of institutions, and save you money. For those of us that are realizing we aren’t paying attention to our credit like we should, we get it. Click below to learn what we can do about it.

Does Your Credit Score Matter?

Imagine two people, not unlike ourselves, moving into a new town for work. They’ve been asked to help head up a new branch that their employer is opening up. They hold identical positions, work the same hours, receive the same salary, and have become good friends over the past few years. A mutual contact puts them in touch with a realtor who knows the area well, and after looking around, the two friends end up wanting identical designer homes in the same cul-de-sac.

Both friends are in their late twenties, both are hoping to start a family within the next couple of years, and both are excited about the new job and the prospect of a new house.

In fact, the only real difference between them is that one is more “into finances”. He keeps track of the money he has coming in and the money he has going out, understands the importance of saving and investing, and knows a little bit about credit score. Despite spending more than he knows he should have on cars and partying in his early twenties, he’s done well with what he’s earned since then and rarely, if ever, misses a payment on anything.

The second guy is just as smart as the first, but doesn’t think or worry too much about money. Growing up, nobody took the time to explain to him why personal finances are important, he wasn’t a fan of math, and he associated budgeting with not being able to spend money. None of this is really his fault, but it is his problem. Despite making the same amount as his friend, he occasionally misses credit card payments and typically only pays the minimum amount. Also, due to an issue with billing and contact information at his last apartment, he recently had some debt in collections from an overdue electricity bill which he recently paid off.

As a result of their respective financial habits and education, the first friend has an excellent credit score of 760. This first, on the other hand, sits at a 635 as he prepares to move and start his new job.

To get the house they’re both looking at, both of the friends need to mortgage $300,000. They each apply and get pre-approved for a 30 year fixed mortgage with an APR right on par with the national average according to their credit score. After pre-approval, both quickly put in an offer at asking price, both offers are accepted, and both guys close according to schedule. Happy with their new homes and excited about work, they move and get settled in. Before long, they each get the bill for their first month’s mortgage in the mail. 

What’s the payment for our guy with the lower credit score? Just north of $1,450. What about the one with a “Very Good” credit score? About $1200. Two friends, living on the same cul-de-sac, in two houses that are exactly alike, with the same salary, have mortgage payments that are different by $250. Over the life of the mortgage, that’s a grand total of about $95K.

Credit ScoreAPRMonthly PaymentTotal Cost
6354.14%$1,457$524,363
7602.55%$1,193$429,543
$300,000/30 yr. fixed Mortgage Rates and Payments according to data from FICO

One Year Later

A year passes, and the two friends are now looking at buying identical new cars. They’ve each got $15,000 saved and want to finance another $25,000. Again, each applies for a loan and gets a rate on par with the national average according to their credit score. What’s the monthly difference this time? About $50. Not as bad as the house, but the guy with the lower credit score is paying about $2,700 more for the same car, even after putting $15,000 down. On top of that, over the course of the past year, he’s paid an additional $3,100 for the same house as his friend.

Credit ScoreAPRMonthly PaymentTotal Cost of Loan
6357.65%$503$30,164
7603.65%$456$27,388
$25,000/60 mo. Auto Loan Payments according to data from Experian

Here’s what that brings these two guys to each month:

Credit ScoreMortgageAuto LoanTotal
635$1,457$503$1,960
760$1,193$456$1,649
Difference$264$47$311
Monthly Payments by Credit Score

It Only Continues…

So far we’ve only discussed mortgages and auto loans. A good credit score can also lower rates and premiums for home and auto insurance, provide access to credit cards that have truly worthwhile rewards (especially if you’re in the military and get the annual fees waived), enable refinancing currently held loans at lower rates, and even get you out of having to pay deposits for necessary expenses like cell phones, gas, water, and power. Bad credit does the opposite: larger premiums, higher rates, less access to credit cards, and expensive security deposits. Click below to learn what the first guy knows.

Build Your Credit Now with SeedFi

For those of us with little or poor credit, the cards seem to be stacked against us. Banks, credit card companies, and even phone companies like to see a solid credit history before offering you their products, but it’s hard to build your credit unless you have access to them. So where do we start?

There are dozens of financial products aimed at helping us build our credit (just look it up), and many of them look great. The problem is that nearly all of these products have hidden costs, upfront administrative fees, or odd restrictions.

The best product in our opinion for anyone looking to begin building their credit (and frankly the only one we really like) is the Credit Builder Plan offered by a Financial Technology company called Seedfi.

SeedFi Credit Builder is one of the most cost efficient ways to build credit

As the name implies, it’s a great way to start building your credit, and as you’ll see, helps build great savings habits as well. Here’s how it works:

When you start a Credit Builder Plan with SeedFi, $500 is deposited into a savings account under your name. Over the next 6-24 months, a small amount (chosen by you) from each paycheck goes towards that account until you reach $500. It feels just like putting aside a bit of money every month for an emergency fund, savings account, or vacation fund. However, what makes this plan so valuable is that each contribution is actually a loan payment that SeedFi reports to all three credit bureaus.

For those of us with little or poor credit history, this can be a huge step towards building your credit.  In fact, customers with less than 3 credit accounts saw an average increase of 45 points after six months on the credit builder plan with on-time payments!

After payments are complete (see options below), the $500 is yours to move back to your bank, leave in your SeedFi account, or cash out for something important to you. What makes us like this plan so much, especially for military personnel with little to no credit history, is that you’ll not only have a bit of cash, you’ll also have a successfully paid off a loan on all of your credit reports and 6-24 months of credit history. Most importantly (in our opinion) you can develop a habit of saving with every paycheck. 

What’s the Catch?

The “catch” is that it costs $1/month. Frankly, for anyone with little to no credit, we think of this as a bonus rather than a catch. If you start looking around at other similar products, you’ll quickly find that most (if not all) are more pricy, more confusing, or less convenient. Here is what a typical plan looks like.

In a Nutshell

The Credit Builder Plan puts $500 into an account under your name. You then make automatic payments with every paycheck, according to one of the options to the right. Over the course of the plan, you’re building credit, good financial habits, and a $500 rainy day fund. The cost? $1 a month over the course of the plan.

Automatic PaymentPlan Length
$1024 months
$2012 months
$406 months
Payment Options

That’s a 5 minute/ $24 (max) solution to build your credit.

Example Plan

SeedFi charges $1 a month to access the Credit Builder Plan. In a typical Plan, at the end of one year the consumer would have paid $512 and would have $500 of savings. If you’re trying to shop or compare this against other credit builder loans that charge an interest rate, the $1 a month is equivalent to a 4.6% APR. SeedFi will provide the Credit Builder Plan for free after you’ve referred one friend.

How to do it:

  1. Go to SeedFi.com.
  2. Select Credit Builder Plan.
  3. Answer a few survey questions.
  4. Create your account.
  5. Link your bank manually or using Plaid (same bank connection service Robinhood uses).
  6. Let your plan work for you.


Please reach out to us at moneygouge@gmail.com with any questions, or see FAQs on SeedFi’s website via the link above.

Money Gouge

Two military guys helping you make better financial decisions and understand how money works.
Learn More, Earn More

SeedFi customers with fewer than three tradelines on  their credit profile experienced an average increase to their  VantageScore 3.0 credit score from 579 to 624 (+45 points)  after six months of consecutive on-time payments (data  gathered from Dec ‘19 through Nov ‘20.)”

Affiliate Links

This article contains affiliate links. Using the links may result in us being compensated by our partners at no cost to you. We do not recommend products we do not know and use ourselves. Articles like the one you are reading can take between 10-20 hours to write and edit. If you like our content and are interested in a product, please consider supporting us by using these links to sign up for our partners.

Take Control of Your Credit

It’s rarely the case that anyone with poor credit is able to fix it overnight. The good news is our credit is entirely within our control, and there are simple, practical actions we can all take to build it. Similar to a fitness test, if we’re able to do a lot of crunches or run quickly for long distances, we’ll have a great score even if we don’t perfectly understand how the system scores it. The following is a guide to the practical actions we can all take, whether we perfectly understand the scoring or not. They’re broken down into actions you can take in the short and long term.

Short Term Actions

  • Check your credit report
  • Monitor your credit with an app
  • Utilize credit building tools

Long Term Habits

  • Never miss a payment
  • Pay overdue balances ASAP
  • Pay full credit balance every month
  • Be intentional when loan shopping

Short Term Actions

1. Check Your Credit Reports

As a reminder, there are three credit bureaus, each of which keep a credit report on you. Yes, you. You can get a hold of these credit reports through companies like CreditKarma or Experian, but the safest (and federally authorized) bet is to use annualcreditreport.com. During COVID-19 (don’t ask us to define that timeline), Americans can get a full credit report from each of the three bureaus, every week, for free. Typically, it’s just once a year from each of the bureaus. 

Important: Make sure you’re on the right site! We recommend using the link above to make sure you go the right website, but if you google it, make sure the page looks like the one below and your address bar indicates that you’re on a secure site. 

What You’ll See:
Composition of FICO 8 Credit Score
  • Oldest and Newest Accounts
  • Summary of Accounts by Type
  • Payment History for Each Account on File
  • Chronological Balance of Each Account
  • Length of Credit History
  • Average Account Age
  • Hard Inquiries
  • Soft Inquiries
  • Public Records
  • Collections

Understanding what makes a credit score

If you are interested in learning more about the components that make up your credit score. Check out our article on this important topic.

Disputing Errors

If you see anything that does not look right, look into it! If there are errors you find on your report, you can dispute them (which will never hurt your score) through whichever bureau’s report you noticed the error on. If there are errors on your credit report, they will continue to hurt you until you fix them. 

2. Use an App to Help Monitor

Reading your credit report is a great thing to do for all the reasons listed above. On a week-to-week or month to month basis though, it’s a lot easier to do a quick spot check on your credit using an app like CreditKarma or Experian. They’re both free, enable you to see your credit score, and give a brief synopsis of which things are helping and hurting. Again, we’re still advocates of looking at legitimate credit reports from time to time, but these two free apps are great for a five minute check during halftime or while waiting for your spouse to get ready to go out for dinner.

Note

CreditKarma uses a Vantage Score while Experian uses FICO, so you’ll probably see a bit of a difference between the two. FICO is used far more frequently by lenders, but looking at both can help find what’s helping and hurting your credit. CreditKarma is the more user friendly of the two, and is usually within 10 points of what a lender will see when they pull your credit.

3. Credit Building Tools

If you’ve got little to no credit history, use a reliable, low cost service to start building it. There are some good products out there to help which predominantly fall into two categories.

Starter Credit Cards

These cards are simple and offer relatively few bells and whistles. They are easy to qualify for and are geared towards encouraging you to pay off your balance in full.

Microloans

Microloans are a way to build savings. You choose how much to save, and make periodic payments towards that goal. Payments are reported to a credit bureau and build credit and savings at the same time.

There are many credit building tools out there. Some are good and others aren’t as useful. This is an important topic and we have a more in depth article on our recommended tools here.

Long Term Habits

1. Don’t Miss Payments. Ever. 

Anything financial that’s not automated is likely to be forgotten about eventually, whether it’s a mortgage payment or a monthly $20 transfer into a rainy day fund. Make sure the following accounts are set up to auto-pay so you don’t miss payments. Every payment you make on time helps a little. Every one you miss can hurt a lot. 

2. Pay Overdue Balances as Soon as Possible

This doesn’t need a ton of explaining. Anything that’s late hurts credit, often accrues interest, and causes financial and therefore personal stress. Do what you need to do to get it paid off. 

3. Pay Your Credit Card Balance in Full Every Month

We can’t overemphasize this. Nobody wants credit card debt, but far too many of us fall into it, especially when we get our first credit card and feel like the world is at our fingertips. We’ve all heard horror stories of young service members not doing this, and paying for it dearly. It’s incredible how quickly one can fall into $17,000+ of credit card debt and a credit score closer to a perfect bowling score than the 700s+. Set your credit card up to autopay the balance in full every month. 

4. Be Intentional About Shopping for Loans

There are two ways a lender can check your credit score:

Soft Inquiries

Soft inquiries are when someone views your credit score. They are not reported on your credit score and have no impact.

Hard Inquiries

Hard inquiries are a formal “pull” of your credit score. They go on your credit report for two years and can have a small negative affect on your score for a brief amount of time.

Hard inquiries are something to be aware of, but nothing to worry about… as long as you’re intentional about them. Hard inquiries that are incurred from applying for a mortgage or auto loan usually drop a score by a handful of points. However, you’re not typically penalized for multiple inquiries of the same kind if they’re done in a short time window, as credit bureaus and lenders understand you’re simply shopping around.

For example, a hard inquiry from three potential mortgage lenders in a week or two when applying for pre-approval doesn’t hurt your credit any more than one inquiry does. The same applies for auto loans. Generally speaking, you have between a few weeks and 45 days to shop around for mortgages and auto loans without multiple hard hits, depending on the credit scoring model.

Money Gouge Tip

Best practice when applying for credit that requires a hard inquiry is to have all your documents in order and an idea of which lenders you’re applying to. This gives you plenty of time to shop around without multiple hard hits, especially if you don’t get the rates you’re looking for from the first potential lender or two. 

Putting it All Together

  1. Rarely can we improve our credit overnight. However, our credit is in our control.
  2. There are actions you can take in less than an hour to get you on the right track.
  3. Simple actions over time can lead to a great credit score. Your hard work will pay off with lower interest rates on loans and mortgages.

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Understanding the Current Housing Market Trends and Where It’s Headed Next

The red hot housing market has been giving the summer heat a run for its money! The dramatic rise in prices (about 16% since last April) has been a roller coaster ride for buyers and sellers alike. Whether you are a homeowner or looking to be one the price of homes has a significant impact on your overall finances. There are a few factors that influence the housing market and where its headed. Understanding them will provide insight about how the market works and when may be the best time for you to buy or sell.

Federal Reserve Data For Median Home Prices Q2 2020-Q2 2021

Factors Affecting the Current Housing Market

  • Mortgage Interest Rates
  • Mortgage Credit Availability
  • Housing Inventory
  • Economic Growth/ Trends

Mortgage Interest Rates

A common misconception is that mortgage interest rates are set to the rate of a 10 year treasury note. Unfortunately, the truth is a little more complex.

  • The Federal Reserve (Fed) sets the rate 10 YR treasury note rate.
  • Mortgage interest rates are highly correlated to 10 YR treasury rates but are their own independent interest rate not directly set by the Fed.

The two independent rates do not always move in tandem. Here is an example from early 2020 where the Federal Reserve (the nations central bank) reduced the 10 year rate but mortgage rates did not follow. The shaded area represents February-April of 2020; right when COVID-19 came onto the scene.

The Federal Reserve Lowers 10 yr Interest Rates in Response to COVID-19
Mortgage Rates Did Not Follow and Initially Spiked

The Federal Reserve Data shows how the two rates do not move in lockstep. The reason why is that mortgage rates are also affected by the mortgage backed security market (the things that caused the 2008 recession). While less direct, mortgage rates are also affected by inflation and tend to rise when inflation is expected. The expected part is important because the expectation alone is enough to drive rates higher. Today, many are expecting inflation to creep up (and it is higher than in the past) so it would not be surprising if rates increase towards the end of 2021.

How Mortgage Interest Rates Affect the Housing Market

When mortgage rates fall your average homebuyer can afford a larger mortgage. Therefore, individual purchasing power increases. It also makes people who were waiting on the sideline want to buy a home now to take advantage of such a low rate. Unsurprisingly, this drives demand and home prices increase. The dramatic rise in home prices over the last 12 months was fueled in part by how cheap mortgages were. More people wanted to buy homes and could simultaneously afford more expensive houses.

Take Aways

  • Low mortgage rates have increased home prices by giving consumers greater purchasing power and making more people want to buy a house at historically low rates.
  • Mortgage rates do not move in conjunction with the Federal Reserve’s set rate on the 10 YR treasure note. If you are interested in buying today you should not wait to see what the Fed is going to do.
  • Rising (or the expectation of) inflation creates the conditions that drive mortgage rates higher. Expect that as inflation remains a concern throughout the end of 2021, interest rates may increase.

Mortgage Credit Availability

Mortgage Credit Availability

The willingness of banks to loan to potential homebuyers. It is measured on the Mortgage Credit Availability Index maintained by the Mortgage Bankers Association (MBA).

Less talked about but equally important is the restrictiveness of mortgage lenders. It is important for two reasons:

  1. Loose credit standards when the market is hot (like it currently is) lead to the same issues that caused the 2008 Recession. It is important that mortgages are made to trustworthy buyers regardless of the performance of the housing markets. This is because mortgage backed securities are bundles of mortgages that are sold to investment firms or insurance companies and essentially act as safe bonds to those companies. Defaulting on mortgages causes a systemic domino effect throughout the financial system because mortgages are packaged like this.
  2. If mortgages are hard to get, it can counteract the effect of lower interest rates. Many people will want to buy a house but will be unable to do so.

There’s a fine balance here for lenders. When rates are low, they make less on every mortgage they sell so the temptation is to sell more mortgages. However, that shortsightedness is now a well understood danger and institutions are also more hesitant to loan with employment uncertainties related to COVID 19.

Understanding the Mortgage Credit Availability Index(MCAI)

The purpose of the MCAI is to assign a quantitative value to lending requirements over the last 10 years. It measures borrower worthiness requirements (credit score, loan to income ratio etc.) of various lenders every 6 months and interpolates between those points. The base of 100 is assigned to March of 2012 so all values are relative to that point. A lower value indicates a tightening of lending while an increase means mortgages are easier to obtain.

Current Trends of Mortgage Credit Availability

Currently, Mortgage Credit Availability is at an almost ten year low and has been trending downward for a year or so. It moved significantly lower during COVID 19 as banks were hesitant to lend in an uncertain environment.

Take Aways

  • Mortgage Credit Availability has been decreasing for a while and will likely continue to decrease in the short term (rest of 2021). Eventually, it will reverse in accordance with the long term trend and mortgages will be easier to obtain. If you are having difficulties obtaining a mortgage right now, waiting may help.
  • The increased difficulty of applying for a mortgage means that the current increase in home prices is a sustainable trend over the long term. The risk factors that caused the 2008 recession have been mitigated so this rally is different. The market may cool down, but a 2008 meltdown is highly unlikely.

If you are interested in learning about mortgages in more details or will be applying for one in the future check out our article Everything You Need To Know About Mortgages.

Housing Inventory

Housing inventory is the primary driver on the supply side of the market. It consist of two major categories:

  1. Number of Homes for Sale (Active Listings)
  2. New Construction Starts

Homes For Sale

The number of homes for sale has consistently decreased over the last few years. This led to a historically low inventory at the same time that historically low mortgage rates created a ton of buyers. These conditions account for why home prices rose from both a supply and demand perspective. Fortunately, this trend has recently began to reverse and more homes have come onto the market in the last few weeks. As home prices increased and homes were selling quickly, more homeowners were attracted to selling and cashing in on the action.

Active Listings Have Increased Since May

New Construction

New constructions are very important in the long term because it creates a greater supply of houses. Years of underbuilding have led to an acute housing shortage across the entire US. This was compounded by the fact that homebuilders were delaying selling homes (to try and sell them for a higher prices later) and supply chain issues such as the skyrocketing cost of lumber. All of this contributed to making the new build house supply insufficient to meet the demand of the market. Recently, housing starts have been increasing as builders resolve supply chain issues that were derived from COVID 19 shutdowns.

New Construction Houses Have Increased as Home Builders Look to Take Advantage of a Hot Market

Home For Sale vs. New Construction

It is important to keep in mind the relevance of these two factors to overall housing inventory. Home Sales is a short term factor. As prices increase, people will be more likely to sell and this can quickly increase the inventory. Conversely, it is very difficult to quickly obtain permits and begin new construction. Home construction is a long term factor; new homes are what grows the overall inventory of houses relative to the overall demand for them.

Take Aways

  • Housing inventory has lagged housing demand for years. This has led to a decrease in available homes. This trend will likely continue over the long term to the benefit of current homeowners.
  • In the short term, more houses are coming to market as owners look to cash in on the high demand. This feedback mechanism counteracts the strong demand. If this trend continues it will slow home price increases over the remainder of the year.

Economic Trends

This market has increased the value of homes across the country, but some markets have been significantly stronger than others. A lot of this has to do with homeowners in high cost of living areas moving to lower cost of living areas or retirees moving to warmer weather. One popular move has been from New York to Florida. The data captures this trend by showing the movement of people and the corresponding strength of the markets.

Welcome to Florida!

According to US Census Data

  • New York’s population has decreased since 2016.
  • Florida’s population has increased since 2016.
  • New York population over 65: 16.9%
  • Florida population over 65: 20.9%

Market Strength According to Zillows Home Value Index

Florida

  • Median Home Value: $305,266
  • 1 Year Price Change (Jun-Jun)- 18%
  • Average Time to sell (Jacksonville, FL): 13 days

New York

  • Median Home Value: $379,475
  • 1 Year Price Change: $13.7%
  • Average time to sell (New York, NY): 66 days

Take Aways

  • Although a rising market has benefitted homeowners everywhere, markets with a lower cost of living may tend to see a steady demand from homeowners leaving higher priced areas.
  • This is a long term trend that has accelerated since COVID 19 freed up workers from a physical workspace. Additionally retirees will continue to Florida over time.

Putting It All Together

The housing market is driven by supply and demand. The demand is driven by mortgage interest rates and mortgage credit availability. The supply is driven by housing inventory and economic trends. Together, all these factors influence the price of your home.

Though we don’t have a crystal ball to see the future, many of these indicators are pointing to a relaxing of the historical conditions that created the strong market of the last year or so. A pull back (or just slowing) of the market in the short term is not a bad thing. It will be nice to be able to buy a place without getting into a bidding war! Over the long term, the data points to this strong market continuing in the future with homes in desirable markets such as Florida appreciating the most over the long term.

If you are considering buying in the future check out the mistakes most first time buyers make.

Interested in learning about more topics like this? Check out our investor community and weekly newsletter that explores where the economy is headed. Don’t worry, they’re both free!

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Tired of Robinhood? Here are Your Best Options

I have loved and used Robinhood for a while now. That being said, I totally understand the increasing frustration with its performance. It began last March when volatile markets made Robinhood users unable to trade their stocks. This has continued, and was dramatically shown with the Gamestop debacle. Many traders who made a ton of money were unable to sell and cash it in. This lackluster reliability is coupled with the fact that there is no support line to call. These are very compelling reasons to switch brokerages.

Robinhood was the first to offer no commission stock trades. Since then, it has become the standard. Today, you have tons of free options that don’t break down when the market gets crazy. Let’s take a look at some of the best and what they offer.

M1 Finance

I have loved M1 Finance for years. While Robinhood got all the attention, M1 also created an easy to use app with commission free trading. The best part of M1 is that they allow you to construct a portfolio. You pick what you’re interested in, set the percentages you want to divide your money between and the rest is on autopilot. Don’t know what you want to invest in? No worries, they have over 80 portfolio types built buy professional investors that you can use. And yes, you can still buy individual stocks or ETF’s.

Let’s say you wanted to stick to mostly index funds but liked tech stocks. You are interested in VTI (Vanguard Total Market), VGT (Vanguard Tech Index) and would also like to own some Alphabet and Roku stock because you think those are awesome companies. Here’s how you could set that up with M1.

You can also automate transfers every month. So if you transfer $500/ month it will automatically divvy it up into the various percentages. This is a big deal because unlike Robinhood you’re not trying to invest the money you save every month. You’re creating a plan (portfolio) of what you want to buy and automating the process. This keeps you from being tempted to use that $500 for the hot stock everyone’s talking about. Automation is discipline and is easily one of the best ways to build wealth. If you do need to change your portfolio allocations, you can do that anytime.

They also offer a super useful way to borrow money for cheap. You can borrow up to 35% of your stock account at between 2-3.5% interest. You can use this money for anything-not just buying more stock. If you have credit card or high interest debt, you could borrow from M1 at a low interest rate and pay it off. That’s an incredibly useful tool to have access too.

As an extension of this, they also offer a debit card and direct deposit so you can pretty much use M1 like a bank account and have all your money in one place (Robinhood offers a similar feature).

M1 will move your current stock over to their system at no charge. In fact, they will pay you to transfer. The whole process takes only a few minutes and your balance determines how much they will give you. These numbers change all the time so be sure to check. I have seen them offer bonus for accounts starting at $10K.

  • $100,000-249,999: Bonus- $250
  • $250,000-$499,999: Bonus- $500
  • $500,000-$999,999: Bonus – $1000

Cash App

The cash app is a super useful tool built by square. It essentially replaces a bank and allows you to keep your money and investments all in one place. Direct deposits are also supported and if you set up direct deposits, your paycheck will come two days earlier than usual.

The investing part is very similar to Robinhood, no commissions, fractional shares and no minimum balance.

The unique thing about the cash app is it’s integration of Bitcoin. You can use the app as a bank account but can convert your money to bitcoin instead of USD. This is actually a pretty wild concept because you can essentially be using BTC as your store of wealth and currency.

Cash app is an amazing tool, you can send people money like Venmo, use it as a bank account and invest all in one place. And for those who are bullish on Bitcoin, you can do all of that in Bitcoin. Basically, your bank account can be denominated in BTC instead of USD.

Vanguard

On this list, Vanguard is old school. That being said, they started low cost index fund investing. Almost every index fund is offered by them. Their brokerage is for investors who want to keep it simple. There is no commission for stock or etfs. You can also buy bonds and options with this brokerage. Options have a $1 commission and bonds have a $1/$1000 commission if you are buying them secondary from someone who already owns them.

What they don’t have is a super slick app that presents the information as well as M1, Cash App or Robinhood. This doesn’t make them less competitive from a price perspective and they still have an app but they are basically just a typical brokerage account. Once you’ve gotten used to an intuitive app like Robinhood, this can be a drawback. It will reduce your temptation to trade but that’s because the information is less readily apparent.

Vanguard is the golden standard of buy and hold investing. Before them, index funds investing was not a thing. If you are interested in buying stocks or index funds for the long run and aren’t interested in checking your investments frequently, this is the account for you.

Head to Head Comparison

FeaturesVanguardCash AppM1 Finance
Price per Stock/ETF trade000
Price Per option trade$1Not SupportedNot Supported
Crypto CurrencyNot SupportedBitcoinNot Supported
Debit Card for Cash AccountNot SupportedYesYes with 1% cashback
MarginYesNot SupportedYes
Margin Interest Rate8.50%N/A2-3.5%
Portfolio Based InvestingNoNoYes
Direct Deposit to Cash AccountNoYesYes
Automated TransfersYesYesYes

Summary

Any of these brokerages will be excellent choices and will be more reliable than Robinhood. Which one you choose depends on how you use your Robinhood account.

  • If you enjoy investing in stock and etfs and appreciate the easy to read format of Robinhood; M1 finance will give you that experience and is arguable better at it.
  • If you like Robinhood because it was low cost, go with Vanguard. They’re industry leader at low cost investing and their reputation is second to none.
  • If you enjoy Crypto currency then Cash App is for you. You can seamlessly integrate BTC into your personal finances.
  • Bonus: Both M1 and Cash App will allow you to have your entire financial picture (bank account and investments) in one place.
  • Low cost index investing
  • Commission Free Stock/ETF Trading
  • Margin/Bonds/Options Available
  • Full Bitcoin Integration
  • Commission Free Stock/ETF Trading
  • All your money in one app

Portfolio Style Commission Free Stock and ETF Trading

Margin is low interest and can be used for anything

All your money in one app

Practical Ways to Create Passive Income

Passive income is one of the most popular topics in personal finance. And for good reason! There is nothing more appealing than having monthly income show up in your bank account after doing zero work. However, getting to this point is not always a simple task.

The first thing to understand is that building passive income takes time, dedication and needs to be aligned with your future goals. This is a marathon, not a sprint and you’re going to need a good reason to keep at it past the first few weeks. Some popular ones include:

  • Family: Not wanting to miss your kids childhood because you are at work.
  • Philanthropy: A lot of people may seek to spend their time contributing to a greater good. Often, this involves a pay cut for a length of time.
  • Freedom: Travelling the world, or being able to not live in one set location are important to many people.

What Assets Will Create Passive Income?

Investors seeking passive income have three primary investment options:

  1. Single Family Real Estate
  2. Multi Family Real Estate
  3. Dividend Stocks

All three will help you earn income without having to work for it, but each option has it’s own pro’s and cons. To build meaningful income streams from these assets, first, you are going to have to focus on saving money to purchase them. Whether it’s an initial down payment or building a sizable dividend portfolio, it takes money to make money.

Let’s say you have saved $50,000 to put towards creating passive income. Now, you want to know which investment maximizes your chance for success. Let’s explore how far 50k will get you in 3 different scenarios. These examples are for educational purposes only, we are not providing investment advice in this article. Simply, illustrating a point.

Single Family Real Estate

In the first scenario we’re going to use RoofStock to purchase our single family investment property. Single family real estate is the most intuitive way for most people to break into real estate. It’s logical and approachable. You can even live in your property for a few years and then rent it out down the road. If this type of passive income interests you but you’re unsure where to start, making a free account with Roofstock allows you to see a ton of investment properties all over the country. Alright, back to the point, you have that $50,000 ready to go so let’s see what they can do for you.

Roofstock’s dashboard gives you all the key metrics for any property that’s listed on their site. The asking price of this home is $115,000 (often a negotiable number). Below that you’ll see a sliding scale for down payment (in percent of the purchase price). Change this and Roofstock will automatically calculate your initial investment. The estimate for the initial investment above ($45,223) includes down payment, closing costs and an estimate for any immediate repairs that might need to be made.

Finding an Appropriate Down Payment Amount

You might be wondering why the down payment is only $45,223 when we have 50K to put down. The reason is that when you buy a property, you need to have money set aside from day one to cover repairs. A good rule of thumb is 10% (5K) of the amount you have saved (50K). Things break unexpectedly no matter how well you inspect a property. You don’t want to be facing the stress of a large unexpected maintenance expense.

Above you can see the total return you will make in the first five years. The total return includes: cashflow and estimated appreciation, in this case it is $34,499. All the other numbers pictured refer to annual numbers. The cashflow for your first year will be $4,199. Not bad for a 45K investment! Cashflow is the most relevant of these numbers because it factors in loan payments , property taxes, management fees and maintenance cost. It is the bottom line you will make after all these expenses. The other key number to pay attention to is annualized return (13.9% for this property).

Annualized Return

Annualized return is the percentage return on your initial $45,223 which includes cashflow and appreciation. Roofstock uses Zillow data to estimate property appreciation. The combination of these two values is the total return you make on your investment per year . Annualized return is often referred to as Internal Rate of Return (IRR). We will refer to it as IRR for the remainder of this article. IRR is one of the most useful metrics for comparing total annual return between different investments.

Your Potential Returns

Okay, let’s see how your 50K would perform as an investment in this property.

  • $349/month in income. Maintenance costs come up and decrease this.
  • IRR of 13.9% At this rate your investment will double in five years. See note below.
  • Tax benefits: In addition to cashflow and total return, owning a rental property comes with a slew of tax benefits such as depreciation and maintenance expenses that will likely help you lower your tax bill while increasing income.

Rule of 72

There is a simple rule of thumb that you can use to estimate how long it will take your money to double. It’s called the Rule of 72. Take 72 and divide by your IRR. In this case 72/13.9 is about five years.

If you’ve done the hard work of saving your money, single family real estate is a pretty compelling investment. You can make hundreds per month in passive income while building your equity and reducing you tax bill. The only catch is that you need to put in a lot of leg work to find a property on your own. Again, the most passive way to do this is through RoofStock but you will need to find a property that will allow you to have positive cash flow.

If you are interested in single family investments, here are a few resources:

Multi-Family Real Estate

In the second scenario we’re going to use Upward Capital to purchase our multi-family investment property. With multi-family real estate you are buying a building that has multiple rental units that each generate their own regular source of income. The most basic multi-family property is a duplex which is a single structure with two separate units. Buying a small multi family is similar to buying a single family property. In fact you can even buy up to a quadplex with the VA loan.

On the other hand, multi-family investments can scale all the way to large apartment complexes with thousands of renters. For the purpose of this article, we are going to focus on larger multi family buildings. Larger buildings tend to be more passive, for example a building with over 70 units typically has a dedicated property manager. There are two primary ways to invest in large multifamily buildings: as a syndicator and as an investor.

How to Invest: As a Syndicator

Syndicator

A real estate professional who coordinates investments in a Multi Family building. They do all the legwork (and there’s a lot) for a slice of the pie. They are compensated with a share of the proceeds similar to investors who are entitled to a share proportionate to their investment amount.

Multifamily real estate takes a significant amount of work to break into as a syndicator. The primary way you find properties that are larger than 4 units are through real estate brokers. Most brokers are not interested in sending you their properties until you have already bought one. Here are some of the problems you will need to solve to land your first deal:

  • Finding enough people willing to give you money to make the down payment (investors)
  • Finding a wealthy investor who can put up collateral to get the loan approved. The bank wants to have the joint net worth of the investors be great enough to act as collateral for the loan. Often, you need to bring in a high net worth individual to accomplish this.
  • Finding a loan
  • Underwriting a property
  • Insurance
  • Property Manager (full time). The rule of thumb is full time staff for properties over 70 units.
  • Legal paperwork for this whole process
  • Finding properties which requires dedicating a lot of time developing relationships with brokers who will sell the property to you.

Networking is a huge part of this. You’re going to need to convince people to invest with you while developing a network of professionals such as a broker, underwriter and lender. To help start this process, you’re going to want to attend a few masterminds, read a few books and build a robust network before you start. If you’re curious, here are some of the best resources to learn:

  • If your are curious about learning more but don’t want to commit to a master mind yet then we recommend Financial Freedom With Real Estate Investing by Michael Blank. He is one of the most prolific real estate syndicators and the book is an exciting and useful read whether you plan to lead or invest in a syndication.
  • If you are serious about learning more as a syndicator then it makes sense to join a mastermind. This is a blend of an online course and networking. The War Room MasterMind is highly rated and attended by a lot of military investors.

How To Invest: As an Investor

Syndication can be pretty daunting. While lucrative, it definitely requires a high level of motivation to break into. Fortunately, there are professionals who will do this for you.  If you come to a syndicator as an investor, your job is as easy as investing in property. You get a slice of the pie proportionate to your input. This is literally as passive as it gets.

The trick is to find a reputable syndicator and not someone who’s running a scam or isn’t honest about the investment you are getting involved in. After all, you are forking over a large amount of savings. Here are a couple of options you have to help you achieve this:

Note

Most syndicators only accept accredited investors. These are investors with seven figures liquid net worth that does not include equity in your home or have an annual income of $200,000 ($300,000 if married). If you are an unaccredited investor you will need to get in contact with a syndicator before you invest in anything. Usually this is a phone call where they introduce themselves and walk through what they’re offering. It is okay to call just to learn more. Per SEC rules syndicators need to have existing relationships with unaccredited investors before investing in a property, so this is how that is accomplished.

  • Upward Capital: I know the founder personally and 100% stand behind them. Currently I am saving to invest with these guys. Their most recent deal is exceeding all the predicted return metrics. (The numbers are even better than our example). Military owned and operated. Accepts non accredited investors.
  • Military To Millionaire: David Pere is an active duty marine who is well known in the real estate investing world. He also offers syndication opportunities in his investments. He accepts non accredited investors.

There are a ton of other ones out there but these two are legitimate syndicators with a proven track record. Many other syndications are only available to accredited investors. Lastly, these guys are both military and to me that’s a huge plus.

Your Potential Returns

SEC rules prohibit us from walking through any specific examples but here is what you can expect to see as far as returns on your hypothetical $50,000 investment (calculated using the most conservative returns).

  • Dividends (8-10%)
    • $333/month in income
  • Appreciation (15-20% IRR including dividends)
    • Your initial investment would double in 4.8 years.
  • Tax write offs
    • Similar to single family, you will be able to receive tax benefits that are applied to the building (just in your proportional share).

Multi family may feel like an exotic investment to many new investors. In fact, it can be simpler to invest in multi family real estate than single family. If you focus on saving money and find a good syndicator then you will get all the advantages of real estate without much upfront work required. It is also a great diversification play, you will have a wealth building investment whose performance is not dependent on how the stock market is doing. If you are trying to create passive income streams, multi family investments make a great addition to your overall portfolio.

Dividend Stocks

In the third and final scenario, we will be investing our 50K in dividend stocks. Dividend stocks are a common way to earn passive income. There are a ton of companies out there that pay dividends, but if you’re going to live off the dividend income then it is key to find a company who is not at a risk of cutting their payout. In addition, you’ll want to own companies who continue to grow their dividend year after year. One particular group of stocks that satisfies this criteria is Dividend Aristocrats. These stocks have raised their dividends consecutively for at least 25 years. Let’s pick a well known dividend aristocrat (IBM) and see what a 50K investment with this company would get us.

Source: Google Finance

The P/E Ratio is a measurement of how many dollars you will pay for $1 of IBM’s earning. This is a good way to compare the relative price of a stock. The dividend yield is how much you will earn in dividends for each dollar invested. In this case it is 4.8 cents.

Your Potential Returns for 50k of IBM

  • $200/month ($2,400/year) in passive income (current yield 4.80%)
  • 1.4% IRR. Your investment would double in 51 years. The stock price has decreased so total return is lower than the dividend.
  • Limited Tax Advantages: Dividend stocks will not give you write-offs like real estate but the income is taxed lower than regular income.

Note

The underwhelming annual performance highlights the disadvantage of single stock investing. With dividend stocks especially, investors tend to build large positions in a single high yielding company. If you put all your eggs in one basket and it underperforms then so will your wealth accumulation. For example, the stock price of ATT is the same today that it was in 1997. All your gains would be from dividends only. This does not perform well compared to every other investment which give you both dividends and appreciation.

Dividend index funds are also an option. They are safer because you are not dependent on the performance of one company but do tend to have a lower yield than a lot of individual dividend stocks. One example is Vanguard’s High Dividend Yield ETF (VYM) which is currently yielding 3.06%.

Your Potential Returns

A 50K investment in VYM yielding 3.06% would get you:

  • $127.50/ month ($1530/year) in passive income (current yield 3.06%). The dividends are distributed quarterly.
  • 11.57% Annualized return (equivalent to IRR). 6.2 years to double your investment.
  • Limited Tax Advantages: Dividend stocks will not give you write-offs like real estate but the income is taxed lower than regular income.

Although, individual stocks may have a higher yield, there is significant risk in putting a large amount of your wealth into a single company. As you can see with IBM there is significant risk when that one company underperforms compared to the market. Index funds will allow you to diversify at the cost of a (usually) lower yield. The biggest drawback to creating passive income with dividend stocks is that it takes a lot of money to create enough income to live off of. For example, it would take $500,000 to make $2,000/ month off of a stock yielding 5%. That’s hardly enough to pay rent in most areas.

The other issue is that stock market valuation are historically high. Because the price of stocks has risen for the last 10 years, it is increasingly difficult to find dividend stocks that are attractively priced. Point in case, the S&P 500 historically had a dividend yield above 3%. At the time of this writing it is 1.53%.

Dividend stocks, have a place in every portfolio, but with the current market environment it will take a long time to build serious income. If you are interested in learning more about dividend stock investing here are some resources for you.

Side by Side Comparison

For the more visual types out there, here’s a chart that summarizes what we’ve covered. Passiveness is a relative scale that weights the work required to set up and maintain these investments. For the comparison we used the performance of the Vanguard High Dividend Yield ETF because of the more comparable overall return(IRR).

Return on $50,000 investment among various assets:

Monthly Income ($)PassivenessTax BenefitsIRR/Annualized Return (%)Time To Double Investment (Years)
Single Family3493Y13.95
Multi Family3332Y154.8
Dividend Stock ETF127.51N11.576.2

Pros and Cons

Okay, hopefully by now you can see that if you are willing to save your hard earned money there are some pretty exciting investment opportunities out there. But which is the best? This will depend on your preferences and comfort level.

Single Family

Pros

  • Diversification- Performance is not affected by stock market.
  • Medium Liquidity: You control if you want to sell or refinance but that still takes time to execute.

Cons

  • Most work to set up if you’re going it alone. Roofstock can help by acting a “syndicator” to streamline the process.
  • Your income stream is dependent on a single rental unit.

Multi Family

Pros

  • Less work to set up if you are an investor. A lot if you are a syndicator.
  • Your income stream is not dependent on a single rental unit.

Cons

  • Least Liquid- You do not control resale or refinance.
  • Least control of investment-finding a reputable syndicator is key.

Dividend Stocks

Pros

  • Least Work- As simple as setting up automatic investments with your brokerage.
  • Most Liquid- Instant liquidity unless market is down then it may not make sense to sell.

Cons

  • Lowest Yield: It is difficult to find a quality stock that will yield as much as real estate in current market.
  • Less Diversified: The appreciation of the dividend stocks can still be affected by the overall market.

Bonus: Another way to Invest In Real Estate

Maybe you want to start investing in real estate and earning passive income, but you don’t yet have $50K. You want to start with a $1000 investment and continue to put your savings to work every month. Fundrise will allow you to capture the performance of real estate without a large initial payment. They do this buy dividing their professionally managed real estate portfolio into shares that you can buy. You can buy these shares like a stock ($1000 minimum starting investment), and have an opportunity to sell them every quarter (three months). You will receive a dividend (which can be automatically reinvested) and they will appreciate over time as the value of the portfolio increases. Essentially, this is similar to buying shares of a dividend stock but the underlying performance is based on recession resistant real estate. Fundrise is a really awesome way to start building passive income if you want to start today.

Here’s Where the Next Bubble May Be

Increasingly, there are articles all over the news about how the next bubble is near. I have been investing and reading financial news for almost ten years now and I promise you it has always been this way. And you know what? Not a single person was writing about COVID 19 before March.

That’s how actual economic shocks work, they come from things that no one is betting against or talking about. Here’s some excerpts from a Motley Fool article circa January 2020 which show why these predictions are mostly noise.

Alright Not a Bad Start

2020 Was a Hell of A Year
Literally Nobody

Netflix is up around 50% over the last year

Bitcoin is up 400% over the last year

I don’t plan on calling the next market bubble and I love the Motley Fool so this is not a jab at them. What I am beginning to question is how mainstream Bitcoin is becoming. I have recently been reading a lot about the Great Recession as well. To me, it seems there are some eerie parallels between the growing pervasiveness of Bitcoin and the wide spread presence of mortgage backed securities in the early 2000’s. Both of these were difficult to value and ended up being falsely perceived as safe. Without making a prediction, let’s ask the important question for where we’re at right now.

What do you think the future of Bitcoin is?

Before we get to that let’s look at what Bitcoin actually is.

What is a Bitcoin?

  • Bitcoin is a digital currency that utilizes blockchain technology.
  • There are currently 17 million in circulation and 21 million is the ultimate cap on how many there can be.
  • There are algorithms that computers run to mine Bitcoin. The algorithm requires more computing power for every bitcoin mined. At this rate it will take 122 years for the remaining 4 million to be mined.

Unique Factors of Bitcoin

  • There is no central controlling authority because block chain technology is decentralized.  If you lose your password to your coin bank there is no help line or anyone you can call. Just ask these guys.
  • There’s not actually bitcoin. Like bitcoin are not digital certificates or something tangible. As Bitcoin is traded, multiple computer servers record the transactions. Your “Bitcoin” are simply part of this tally of who has what.
  • We don’t have a system for valuing Bitcoin. How do you value a tally of things that don’t actually exist? It’s much more difficult than the stock of a company that makes money selling actual tangible goods or a metal such as gold which has intrinsic value.

It’s a pretty insane concept so here’s a quick video to help.

Bitcoins Performance

Bitcoin has absolutely crushed the stock market as an investment. Because of its scarcity, decentralization and success it has gone from fringe investment to mainstream. Companies and large firms are increasingly viewing it as a store of wealth similar to gold. It’s tempting to draw that parallel but remember gold is actually a physical object that you lay claim to when you purchase. Bitcoin is a transaction ledger of things that don’t actually exist. That’s a little different.

Bitcoins success is actually where the risk lies. I don’t think it’s bullish run is over at all, which will continue to suck more people in. Now that mainstream companies like Tesla and Square have purchased bitcoin, executives at almost all companies are at least thinking about whether they should buy it to add to their balance sheets. If Bitcoin’s run continues then it’s likely more companies will give in to this temptation to capture some upside. Furthermore, Bitcoin ETF’s are being bought hand over fist by retail and professional investors alike.

Therein Lies The Risk

The more successful Bitcoin is the more it will continue to permeate throughout our financial world. This is an asset that no one understands how to value and that there is no central figure to provide regulation or assist when it crashes. Bitcoin has shown that it can halve in value in just a few days yet more companies are using it as stores of wealth for their balance sheets. Imagine if the US dollar was half as valuable a week from now and the damage that would cause.

I Don’t Own BTC So Who Cares?

Well we all do now. Between your retirement account and regular investment account you are almost guaranteed to own the S&P 500. Now that Tesla has bought Bitcoin you have exposure to it if you own the S&P. Sure, their 1.5B Bitcoin purchase is not going to drastically affect the entire index but what if more of those companies see them making money off it and follow their lead? The risk is that the balance sheets of these companies may appear safe when in fact they are built on a house of cards. Combine that with the increasing amounts of money that investors are pouring into Bitcoin. Suddenly, your exposure is everywhere. This brings us to a situation eerily similar to the early 2000’s……

What Does Bitcoin Have to Do with The Great Recession?

Back then, the crisis centered around mortgage backed securities (MBS).

Mortgage Backed Securities

MBS are essentially bonds that contain multiple mortgages in one security. This acts like a bond because the owner of the MBS receives mortgage payments in the same way the owner of a bond receives payments on debt. Because there were multiple mortgages bundled into one MBS, these securities were deemed especially safe. One failure to repay could not take down the whole security.

Overtime, pensions, hedge funds and individuals began to stock up on these new securities. Banks made money selling their mortgages to hedge funds and other banks that created MBS. They began to give mortgages to people who couldn’t really afford them so they could have more mortgages to sell.

Everyone upstream thought they had safe assets without having any way to value or understand these securities. As long as the housing market increased their securities and the homeowners below them would continue to be okay. Obviously, when the housing market lost steam and interest rates increased (making mortgages more expensive for people who couldn’t really afford them) this all came crashing down. Those multiple loans in one security were all bad so there really was no safety from the fallout.

The mechanics of MBS compared to Bitcoin are obviously different. But the broad takeaway is the same.

Here was a hot new type of unregulated investment that people were making tons of money on. As it’s bullish run continued it began to become viewed as more safe. This perception allowed it to permeate throughout the financial world until it formed a substantial part of the wealth of everyone. The lack of regulation allowed an insanely profitable bullish run but it also allowed it to disappear overnight. This is what can happen when market forces are not regulated.

So What’s Next?

Will Bitcoin cause the next bubble? I don’t know anymore than you. And I sure as hell won’t put myself out there and become the next article like the ones in January 2020 that had no idea of the 800lb gorilla in the room.

 I do think as an investor you need to question everything. And I think an important question we should be asking is what is the future of bitcoin? Increasingly, the answer is going to affect all of us. 

For the record, I think Bitcoin is an awesome idea. I’m a fan but I don’t know where this goes from here. I think one the best ways we can prepare as investors is to study the past. To understand bubbles the absolute best book is Big Debt Crises by Ray Dalio. He covers tons of crises throughout history and makes them easy to understand. He also made money in 2009 when everyone lost it because he was able to see it coming. If you want to be a better investor and understand where we might be headed, reading this book will get you there a lot faster than the news.

Thoughts on Bitcoin? We’d love to hear them.