I’ve seen other posts talk about using the career kickoff loan to make a few hundred bucks by putting it in a HYSA, CD, etc. what I’m thinking about though is just an index fund such as VTSAX (and max out Roth IRA).
To clarify, the monthly payment on this thing is $450. That’s less than the amount that I was planning on investing each month given my low costs. So, if I can just invest all 25k now, isn’t that a no brainer? I’d be able to reap the returns of having a longer time in the market with more capital, right?
The catch is that I’d be paying 3% interest for the privilege, so there’s a risk that I lose money on the deal, but that would be unlikely given prior performance. Not to mention, I have an offer from a bank to give me 1500 if I just park 20k in a hysa for a few months, so just in doing that I’d make back almost the full cost of the loan (1900 if you take out 25k).
I’m new to this so I’d really appreciate it if anyone sees some sort of hole in this strategy. Only other thing I can think of is that it could affect my ability to get a credit card by having this debt?
Investing career starter loan
byu/Cold-Collection-4898 inMilitaryFinance
Posted by Cold-Collection-4898
4 Comments
It’ll ding your credit in the short term, but it will help in the long run as you pay it off
My words of wisdom for investing come from my grandfather “don’t make bets you can’t afford to lose.” The stock market took a massive dip yesterday and people were becoming very concerned that the fears of a recession could actually spark one. There’s no guarantee that the amount is higher at the end of 5 years.
If you’re comfortable making payments on it and okay with the possibility of losing it, I would say go ahead. If you have no loans now, I would max your IRA and park the rest in a settlement fund or HYSA. I tend to lean to the more risk averse side though
Lot of CDs paying 5% right now, personally I paid off my vehicle and maxed an IRA before doing my taxes. Whatever I had left I put into fidelity for CDs and whatnot
BLUF: It’s a bad idea due to the impact of leveraged assets and the risk of market decline. Dollar cost averaging from your paycheck is a better idea from a behavioral and mathematical standpoint.
This is like juggling chainsaws to win a bar bet: outsized risk with a less than spectacular return. You’re correct in that IF your investment achieves a rate of return higher than your interest charged, you’ll make money. What’s completely omitted here is that markets aren’t a nice, smooth march to prosperity. Lean times come and they’re not as predictable as we wish they were. It’s totally probable that you could throw this lump sum in the market, then watch its value erode for YEARS for reasons beyond your control, all while you still have to pay interest on the loan.
I recognize the appeal of dropping this seemingly large lump sum in at the start of your career, especially as you watched the broad markets have massive returns over the last several years.
I’ll offer this: what’s the real difference in this scenario between a) your leveraged lump sum plan and b) dollar cost averaging into your investments with your paycheck? Vanguard found that while lump sum investing tends to beat out dollar cost averaging the same amount over the same span of time, the difference in ending asset value is only about 2.2% in favor of the lump sum (based on an all equities portfolio from 1976 to 2022). So what does this mean? It means you’ll likely come out BEHIND dollar cost averaging because the APR on the loan is greater than that historic 2.2% advantage.
Here’s what I did and in no way am I saying I did it the “right way”:
I took my loan out at the first possible time (12 months before commissioning for ROTC) and knew I wouldn’t have to make a payment until 6 months after commissioning, so I’d had 18 months no interest with the loan.
I invested in a mix of the S&P, a couple individual stocks, and Bitcoin. Due to the timing I’ve made almost 35% on the loan in this time and will likely sell by the time of my first payment and enjoy the money I made.
KEEP IN MIND: I consulted people I believe smarter than myself and felt ok putting this money into risk assets. If those assets went down, I would not have sold. I would have considered it an opportunity to invest 25k earlier than if I invested my paycheck and just made my payments. Ask any questions if you like.