Investing Your Military Career Kickoff Loan
“The most powerful force in the Universe is compound interest.” - Albert Einstein
PLEASE READ: Nothing I say here constitutes professional financial advice and readers are encouraged to do their own research when making financial decisions. I am not a certified expert on financial matters.
TL:DR: Take out the loan, park most of it into the S&P 500 but leave some money to bet on individual stocks. In the long run, you should make a lot more gains than the interest charged, making it worth it almost every time. Don't trade risky financial derivatives until you've actually generated some decent cash to cover your original loan amount.
I genuinely believe that nearly everyone planning to commission should seriously consider taking out a career kickoff/starter loan to invest even if you don't know anything about investing (assuming they have other, more pressing use cases for it like consolidating high-interest debt or using it for an emergency). In this post, I want to go over what a career starter loan is, why it's advantageous for investing, and the possible ways that officers can use it to invest.
If you stick around till the end, Ill show you I made a quick $1,000 within 3 days of receiving my Career Kickoff Loan.
What is a Career Starter/Kickoff Loan?
A Career Starter/Kickoff Loan is a low-interest personal loan offered to military officer candidates, such as those in ROTC, service academies, or OCS/OTS, as they prepare to transition into their roles as commissioned officers. Depending on your commissioning source, you can take out around $25,000-$32,000 at around 1.25%-2.99% interest and defer your payments after 45-180 days after academy graduation or commission.
Many people, including myself at one point, have a knee-jerk apprehension when they hear the word "debt" or "loan". It sounds scary and it seems if I do something wrong, I might ruin my life. Doubly so if you plan to invest that money. While I believe that sometimes that fear is not completely unfounded and there are definitely some financial products you should never use as leverage to invest like a title loan, it's important to understand that not all debt is created equal. There is "good" debt and "bad" debt. The career kickoff loan is good debt because of it's favorable terms which I will explain later.
But doesn't debt take away more money from my pay every month? I won't be able to spend as much money on other stuff I want, right?
Well, yes and no.
I'd argue that one of the biggest selling point of the career kickoff loan is that you can take out this loan before you officially commission and payments can be deferred until much after commission. So, you actually have a pretty long investment window before making your first payment. In the case of OCS, you can take out a loan 4 months prior to commissioning by showing them your DD Form 4 at a Navy Federal Credit Union or USAA, and you won't have to pay anything until 6 months after graduating OCS, which gives you 10 months of "free play time" where you can invest your loan without making any monthly payments. For ROTC, it's around 18 months, and 24 months for service academy grads.
Should I pay back my loan as soon as possible once I have to start making payments?
You could because there are no prepayment penalties on the career starter loan, but you shouldn't. And I'll prove it to you using math (it's easy math, don't worry). I'll use the terms of my own loan to demonstrate.
When I was going to OCS, I took out the maximum loan amount of $25,000 at 2.99% to be paid over 5 years 6 months after graduating OCS. My total loan to be repaid comes out to $27,525.23 with a monthly payment of $458.76. My total finance charge (the total interest) is $2,525.23 ($27,523 - $25,000).
If you can make more than your finance charge by keeping the loan by the end of the loan term, then you will have made a net positive investment and you should not pay it back immediately assuming your goal is to maximize how much money you can make with this loan.
If you park $25,000 in an S&P 500 index fund (which should return an average of 10% over 10 years) immediately after you receive the funds, your ending balance at year 5 should have compounded to around $40,262.75 with total interest gained standing at around $15,262.75 ($40,262.75 - $25,000). By the time you have paid off your loan, you will have made a net gain of $12,737.52 (total interest gained - finance charge). This gain will only increase the longer you have stashed away your investment.
In what ways should I invest my Career Starter/Kickoff Loan?
That really depends on your risk appetite and how far you are willing to go to manage your investments. I'll outline some multiple approaches to investing with varying risks associated with each approach.
0% Risk Option: High-Yield Savings Account
If you do not like any risk or uncertainty at all, and the thought of even losing any part of a loan to downside keeps you up at night, just park this loan in a High-Yield Savings Account (HYSA) which will give you an average return of ~4.75% per year. You'll make more than you give out for the finance charge, and there is absolutely 0 chance you lose any money.
But, and this is my personal opinion, this approach is not optimal if you are a young officer. If you are at the start of your career and you have very little to lose, you should be taking risks (smart ones). If there is ever a time to make some mistakes, it is now, not later.
This is not just my youthful bravado and naivete speaking. This rationale is also the same reason why professional money managers give an outsized allocation to equity securities (stocks) which are riskier in the beginning years of a target fund rather than fixed-income securities (treasury bills, HYSA, etc.) which are considered safer.
Safe and Convenient Option: S&P 500 Index Funds
If you can stomach the vicissitudes of the market but don't want to do your own research on what to invest, just park the loan into an S&P 500 index fund. Essentially, your money will be distributed to the 500 biggest public companies listed on US stock exchanges. The theory is, if you invest in this aggregate which represents the US economy, it's the same thing as investing in the US economy.
Historically, over a long period of time, the US economy has done pretty well. The S&P 500 will give you an average return of 10% (this is assuming you keep your money in the S&P longer than 10 years). This doesn't mean you can't lose money when you put your money in the S&P 500. You definitely can. But over a long enough period of time, the ups will supersede the downs and you'll make more money than you lose. This behavior is pretty consistent and you can check for yourself.
If you park your $25,000 in the S&P, that should turn out to around ~$160,000 in 20 years. If you contribute $500 to the $25,000 every month for 20 years, it should compound to around ~$500,000 over 20 years. Comparatively, if you didn't have a $25,000 in your balance when you first started investing and just contributed $500, you would have only $360,000 after 20 years.
Riskiest Option with Highest Potential Payoff: Active investing
Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. So, instead of parking your money in an index fund and forgetting about it, you do your own research of the the risks and potential upside associated with an investment and invest accordingly.
Let's get something straight from the get-go. When I speak of "risk" here, I'm talking about reasonable and calculated risks, not the degenerate gambling type of risk. DO NOT go full-fucking wallstreetbets and trade deep out of the money options on penny stocks using your Career Kickoff Loan. You will lose all your money.
I think this option is the best because it forces people to get a better appreciation of finance, learn how to assess the value of something, and get better at making calculated risks. I'll make a dedicated article on my thoughts on active investing so look out for that.
I want to make clear that active investing is not inherently risky. In fact, you could invest actively to make investments less risky. For example, in the case of the S&P 500 if you put your money in an S&P it should, in theory, be diversified; but about a third of the the S&P consists of tech companies. Within that sector, it's about 7 companies that dominate.
If you are getting clear signals that we are in a tech bubble and that the prices are way overvalued, maybe you reduce the shares of tech companies in your portfolio to protect against a possible tech slide.
Ultimately, the way you choose to construct your portfolio is up to you but this is my strategy using a career kickoff loan:
Firstly, because you are investing on unsecured leverage (debt), you really don't want to be put in position where you can lose your entire investment amount. In the beginning I parked most of my money into the S&P, and left around $9,000 to make some riskier event-driven plays on Robinhood (don't judge me; the fees are lower).
Event-driven plays are any investments you make to exploit uncertainty surrounding some sort of event (earnings calls, mergers, elections, etc.). For me, I'm currently making a play on FMAC (Fannie Mae), RIVN (Rivian) and ACHR (Archer Aviation) in anticipation for the second Trump administration. I'll try do a full in-depth analysis of all of these stocks somewhere later.
I bought 634 shares of ACHR at $6.30 and 192 shares of RIVN at $10.41 the day I got my loan. Currently, 3 days later, the prices are $7.56 and $11.51, netting me a cool $1,000. I've already made 12.15% on my portfolio. which is around 2% higher than the annual return of the S&P 500. So, if I cash out now, I've already made more money that I could have made in the S&P for the entire year. But if I can make 1 good play every month, then I could potentially make many multiples than just the S&P.
Using active investing, I've already made half of my finance charge for my loan 3 days into getting it.
What about stock options that aren't completely stupid?
Unless you are using them to hedge against your long/short position, you really shouldn't be trading options until you've made enough money to cover your loan amount. That is to say, if you have $26,000 in your brokerage account, $25,000 of which is debt and $1,000 are gains from your investments, you should only limit yourself to trade $1,000 in options.
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