Written by: Dan Tapia
TLDR Summary at end
If used correctly, the career starter loan is an incredible opportunity to build a strong financial foundation early on. That being said, we understand it is often used for necessities such as buying a car or paying down debt. We saw our very own classmates do just that, as well as several other paths people chose to take with their loan. We’re here to tell you how those different choices have played out five years down the road. We’re hailing from the future to share them with you.
- Amount: $32,000
- Interest Rate: 1.25%
- Loan Length: 5 years
- Estimated Interest you will pay over 5 years: $1,027.07
- Only available to officers commissioning from a Service Academy
- You can defer payments until up to 90 days after commissioning.
One thing you need to understand is that it helps to have a plan before you take the loan. Even if you think you know about investing I promise you everything changes once you see more than $30,000 in your bank account. This is especially true if you are at a service academy with relatively low living expenses making a few hundred dollars a month. It’s more money than most 21 year olds have seen in their life.
Having a plan is what’s going to keep you from buying a car because you “can afford it” or going all in on a stock you know nothing about. These become incredibly tempting once that money is in your account, but if you fall for these traps you will miss one of the best financial opportunities of your lifetime. And oh by the way that brand new car? You can’t take it on deployment. Here are some real life examples of how we’ve seen this loan used – including our own stories.
Buying a Car with the Career Starter Loan
I totally understand that you need to have a car in the military. As soon as our class got our career starter loans Jeeps, trucks and Mustangs began to coincidentally show up in the parking lots.
Welcome to the Car Show
Let’s break down some math on an academy grad (who shall remain nameless) who chose the fancy car route with his loan. Most of you are likely assuming this story will start with “he bought a new corvette” or “He blew his money on a Mustang GT”. Well, The unsuspected culprit today is actually that souped-up truck that military parking lots are notoriously full of. Midshipman X spent the entire $36,000 as a down payment on a $60,000 truck. That’s still $24,000
(the price of a small new car mind you) on a car loan at 4%. Meaning a monthly payment of roughly $442 on top of that $620 a month he’ll owe to pay back the starter loan for the next 5 years. That’s over $1,000 a month good ole Midshipman X will pay for his brand new fancy truck! And we haven’t even lumped insurance into that yet…If only Midshipman X had heard of Money Gouge 5 years ago, maybe he could have avoided this costly mistake!
I understand that this is incredibly tempting. I love cars and it was really difficult for me to get past this. If you are dead set on buying a car here are a few considerations:
- Are you better off financing through the dealer? Dealers usually give the best “deals” to buyers who are financing a car. Nowadays, interest rates are so low that they are very similar to the interest offered by these loans. If your credit is good enough you may find yourself with a loan that has similar interest and lower monthly payments. If not, then using the low cost career starter loan to buy a car makes more sense.
- Can your parents help you? I’m going to be brutally honest here. If your parents have saved up for college and you attend an Academy/ROTC they might be able to help you with a car purchase because college costs were significantly reduced. I am not making any assumptions and I understand people come from all sorts of financial backgrounds. That being said, most people I knew actually had their parents help them with cars. Some got new cars but most people, like myself, took the old family beater. The details determine the feasibility, but honestly this is a great move if it’s available to you.
- What will your life look like? I love sports cars so I totally understand the temptation. But you need to understand how impractical a two seater sports car is.
- You are guaranteed to be moving across the country after graduating. That means putting a ton of miles on whatever car you buy. Also, you will 100% be living out of your car at some point and need the room for your stuff.
- A lot of bases are in places where it snows.
- If you are getting deployed right away or moving OCONUS it will be a while before you see your car but you will still pay for it every month.
- If you are under 25 the insurance for a sports car is downright depressing. I was paying over $300/month for my Kia Stinger with a clean driving record. I would much rather be investing that money than handing it to an insurance company.
- Buying a fuel efficient used car makes more sense than a fancy new one for almost everyone. The military lifestyle means you will be putting tons of miles on your car and that it will be sitting in a parking lot for months at a time. And let’s be honest, the features of a 2015 model are not significantly different from a 2021. If you want to explore car buying more than our article on that will help you with that process.
Investing the Career Starter Loan (The Wrong Way)
So there I Was..
Sitting in an economics elective class. You would think that of all majors, economics majors would know how to invest their loan. WRONG. The truth is we were young, dumb and knew enough to be a danger to ourselves. My buddy sitting next to me was talking about a Canadian gold mine stock. He had read a few “convincing” articles on how it was about to takeoff. He also had over $30,000 to put into it courtesy of USAA. I tried to talk him out of it but he was dead set. He pulled the trigger and bought a little over $30k in the middle of a lecture. An hour later the stock tanked and was worth only 40% of the value. He decided he was going to hold until it went back up. A week later the stock was kicked off the NYSE.
I know not one but three people that vaporized their Career Starter Loan in less than a day. They bought crypto and hot stocks that they read about on Yahoo Finance. It is important to recognize if you are the type of person that will be susceptible to this. If you enjoy reading about stocks and making trades on Robin Hood then you will 100% be tempted to trade your loan. $30,000 will hit your Robinhood account and the temptation to double it or trade it will lead you to take unnecessary risk.
Not losing such a large amount of loaned money is more important than the gains you will get from it. Trading such a large amount will also lead you on an emotional roller coaster as you make or lose large amounts of money. There is a whole field of study called behavioral finance that demonstrates how humans are subject to biases that make them bad at trading stocks. This quick video shows one of the many ways our brain is terrible at dealing with money.
I saw two people lose 70% on a penny stock in a matter of hours and one who did the same with crypto. Imagine making payments of over $600/ month for five years on money that no longer exists. That’s the opposite of building wealth. Unfortunately, I do not know of anyone that successfully traded with their loan and actually made money.
Having a plan will keep you out of trouble if you are interested in finance and stocks. Invest it the right way with a long term, hands off approach so you don’t lose your whole loan in a matter of minutes. If you’re insane enough to bet your whole loan like this at least go to the casino so you can get a free drink out of it.
Investing the Career Starter Loan (The Right Way)
In my opinion and from what I’ve seen index funds are easily the best way to turn your loan into serious wealth. A lot of advisors are against taking a loan to invest. But that wisdom is not talking about a loan of about $30,000 at an insanely low interest rate when you are still in college. Those same advisors would also agree that investing large amounts of money as early as possible in life is the absolute best way to guarantee wealth. You have an insane opportunity in front of you if you put that money to work and just let it sit.
Ignore the noise about the stock market as well. I promise you, in 2015 the market looked overvalued and had been on a streak for years. No one thought there was more room to run. Here’s how that played out:
- $30,000 invested in S&P 500 in 2015 is worth just over $60,000 today.
- $30,000 invested in 2015 in the Vanguard Technology Index (VGT) composed of all those “overvalued” tech stocks would be worth $104,000 today. That’s the type of money where you buy investment properties in cash.
The best part is it literally takes no effort. Just open a M1 Finance or Vanguard account. Instead of worrying about stocks and following the market, you can let it grow in the background while you focus on your demanding career. With M1 you can even build a portfolio of index funds and choose the percentage allocated to each. For example, if you did 50/50 VGT and VOO (Vanguard’s S&P 500) then you could set up recurring monthly contributions that would automatically be divided between the two. My wife invested in ETF’s like this and more than doubled her loan.
Which Brokerage Account is Best for You?
Interested in comparing brokerages and seeing how M1 can automate your portfolio?
Why My Wife is Smarter Than Me
My wife invested $30K of her Career Starter Loan in 2016. It was invested in a few blue chip tech stocks and index funds. She chose to go with her family financial advisor to help her decide where to invest. This is totally okay if you are uncomfortable with investing such a large amount of money or you are new to investing and want that security of a professional protecting your money. Just make sure your advisor uses a fixed fee. This is a flat rate they charge regardless of the amount they manage. My wife has not touched any of her investments since buying them and today they are worth over $80K. If you’re interested in exploring the idea of a financial advisor, Military One Source or Fleet and Family at your duty station are great places to start and offer them free.
Yes, you will still have loan payments but who wouldn’t be willing to make monthly payments to have $60-100K of assets? The best part is that time is on your side. Investing the money right away allows you to arbitrage the low interest rate (less than 2%) with the higher returns (10+%) the market is giving you. The money will grow with little to know effort of your own. If you are more interested in real estate, you can get appreciation, cash flow and tax breaks.
Buying Real Estate with the Career Starter Loan
If you are motivated, patient, and willing to put in the time, this is a totally doable option. There are a few considerations you will need to address:
- Getting a loan: You will not be able to qualify for a mortgage when you are a cadet/midshipmen. You can get around this by waiting until you commission or partnering with someone who can qualify for a loan. I partnered with my dad who was also interested in real estate and was able to qualify for a mortgage.
- The rest of your financial picture. You will likely need all of your loan for your down payment. If that’s the case do you still have emergency savings, transportation and money left over in case something breaks in your rental property? You will not be able to invest safely if the answer to these questions is no. Again, this can be mitigated by partnering or focusing on less expensive properties.
How I Doubled My Career Starter Loan
I was highly interested in real estate after getting my Career Starter Loan. After a lot of research, I felt confident enough that buying a townhouse in the Annapolis area would be a worthwhile investment. I knew I would not be able to qualify for a mortgage so I partnered with my dad to buy a place. The mortgage was in his name, but we went 50/50 on all the costs. I ended up putting down around $30K between a down payment and closing cost. The place has been rented ever since, and today I have about $75K in equity.
If you are still interested in real estate at this point there are a few ways to go about it.
- You can look in a local area that you know and understand very well. This will give you a good idea of properties that will rent but requires a lot of research to verify it.
- Another option is to use RoofStock. They are a tried and true company that does all the heavy lifting for you. Many of their properties are already rented, less than 100K and they pre-screen property managers to find the best. The reason they are so popular is because they mitigate the risk of trying to get it right on your own the first time.
Interested in Buying a Rental Property in the Future?
If you are interested in learning more about buying a rental property in the future Roofstock is a great place to start. Making a free account allows you to see investment properties across the country that are for sale and the analysis of their performance.
Real Estate should be approached with caution- not because it is a bad investment- but because it is a large investment relative to your income and net worth as a junior officer. If you are incredibly cautious and mitigate the risk then it is likely to be a life changing investment. If I had done this again today, I would use RoofStock (but I had no idea about it in 2015).
Another alternative is to save the money for a down payment on a house at your future duty station. You can then split the house with roommates. This is a really good way to ease into real estate but you still need to meet all the criteria above before you ever buy a home.
A Simpler Way to Buy Real Estate
If you are interested in the diversification, cash flow and appreciation real estate can offer but are not yet interested in buying a property there is a way to buy real estate like stocks. The advantage of this is that it is super passive, pays dividends and is not affected by the stock market performance. One of the best out there is Fundrise. They hold a large portfolio of professionally picked real estate. You buy share of different portfolios just like a stock and then set and forget it while your money and dividends grow. You can sell your shares once per quarter so it is much more liquid than a house.
All the advantages of real estate, with the simplicity of a stock.
Fundrise provides dividends, appreciation and diversification. This is an awesome way to passively grow your investment if you are not yet ready to buy a property. If you are considering index funds for the simplicity, it’s worth checking them out too.
Building Savings and Taking Trips
Regardless of whether people spent their loan on a car or invested it, almost everyone took a small amount and applied it to one of these categories. If you have not saved money up until this point then you should take some of this money and use it to build your savings. I would recommend having at least $5000 in savings when you commission. It sounds like a lot but a security deposit alone will likely run you at least $1500 and life costs a lot more on the other side. The peace of mind you get from having money in the bank is huge.
You can even keep it in a high interest bank account like Marcus or Ally. Today they only give you .5% interest but back in 2019 I was earning 2.5% in guaranteed interest with Marcus. I suspect that as interest rates increase in the next few years we’ll see that again.
You don’t have to go crazy, but if you take some money ($2,000 or less) and use it for an awesome Spring break it’s 100% worth it. It is incredibly difficult to take these trips after you graduate. So many people deferred trips like this until after they commissioned and then they never actually made them. In the real world Spring Break is not a thing. Also your friends will be on completely different schedules and will be all over the world. Not a single person who used some of their money for this regrets it. I know I sure didn’t. I especially hold this to be true if you are at an Academy. You don’t have many opportunities to do something like this in such a regimented environment. Take advantage of them while you can.
The Money Gouge Recommended Way To Use Your Loan
Here I am hailing from the future to share with you what I have learned and what I have seen others do with their loans. Hindsight is 20/20 and I have had the luxury of seeing how everything played out for those who spent their loans in various ways.
In general here’s what we recommend:
- If you don’t have a decent savings, use some of the loan to increase your savings to at least $5,000. Good work if you have already cleared this bar!
- If you need a car: Are your parents able to provide you some support? Whether they can or can’t buy the bare minimum you need. Spending a little money on a trip and investing as much as possible is a lot better than blowing it on a fancy car.
- Depending where you are at this point it’s okay to take a little money and have a fun spring break. Just don’t go crazy. Trust me, it doesn’t take much to make memories that will last a lifetime. Still take the time to research a good deal, it makes it all the more exciting knowing you didn’t over pay.
- Invest whatever is left. Hopefully, you’ve set yourself up to where this is still a large number. Technically, this is the bottom line, the more you invest, the better off you will be later on. Speaking from experience if you get this right it will grow to be an amazing amount much quicker than you would think. If your new or nervous about investing keep it simple and stick with index funds. If you are more motivated and your finances support it then real estate could be right for you. Opportunities like the Career Starter Loan can put you leaps and bounds ahead of your peer group. In fact, this opportunity alone is one of the major reasons we started our website.
Bonus: Invest Your Career Starter Loan with a Roth IRA
If you want to take some of your investing portion and put it in a ROTH IRA that is totally fine too. Any money you invest in a Roth will be tax free for life. The catch is you will not be able to withdraw it until you are 59.5. The current annual contribution limit is $6,000. One way to play this is if you get the loan in October-December you can invest $6,000 before the year ends and $6,000 on January 1st. After that, you can just put the rest in a regular brokerage such as Robinhood or Vanguard.
Knowledge is the Best Investment
Congratulations on having access to such a large amount of low interest money at such a young age. This loan is one of the first financial opportunities that you will be given as a result of your service and the countless hours of BS you put up with by choosing service over being a regular college kid or graduate.
If you have any specific questions about your situation feel free to reach out to us on our facebook page. Whether you’re looking for advice or just trying to figure out your next move, we’re building a community of military investors and would love to have you.
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