What you need to know about 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 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.
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.
The stock market is one of the best ways to increase your wealth passively. You can buy individual stocks or index funds.
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.
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.
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.
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%
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.
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.
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.
- No cost for buying stocks/etf’s
- Dividend Reinvestment
- Fractional Shares
- $30 Sign On Bonus
- Portfolio Style Investing
- 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:
- Max Annual Contribution: $6,000
Annual Contribution is deducted from your taxable salary for this year
- Annual Contribution is tax free for life
- 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?
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:
- 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.
Yale endowment fund allocation in real estate.
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).
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%.
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.
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 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.
- Dividend: 6.97%
- Average 5 year return: 8.6%
- Value of $3k investment made in 2016: $4,531
- Dividend: 3.02%
- Average 5 year return: 12.98%
- Value of $3k investment made in 2016: $5,522
- 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.
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.
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.
Two military guys helping you make better financial decisions and understand how money works.
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