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Financial Leveraging
h3ndu
Registered User regular
Registered User regular
Ok, so here's the story.
I joined the US army in 2005, had a great time, got filed into the reserves and started college. There I joined the ROTC program, did very well and have managed to earn a commission as a 2LT active duty- I'm hoping for Vicenza, Italy 173rd airborne brigade, but that's not really the point of this post.
The point is, that USAA offers a $25,000.00 career starter loan to all incoming lieutenants. It's a 2.99% APR (as I understand it, in this economy that's a screaming deal). I'm thinking very hard about taking this loan. I have no debt - I've paid for school out of pocket (not using my GI bill) by working three jobs (so no school loans at all), and the only loans I've ever had were car loans (paid in full, ahead of schedule). I have almost no credit history - and have only recently started using a credit card to try and rectify that.
I don't really need the money. I live very much within my means; however I have been toying with the idea of taking it out, and investing the loaned money.
The big things for me, or the big things that have been advised to me, are Gold, Silver, hard tangible assets (guns, land, houses, cattle) primarily - but a few people have recommended mutual funds. I've been told to steer clear of Bonds and CD's right now.
I was looking for opinions on weather or not this is a good idea or bad idea at all to try - weather hard assets are wise (Gold is $1,800 an ounce right now, will it really get much higher?) - I understand already that the entire idea is dangerous at best, but the possibility of return is something that has weighed heavily on my mind. Does anyone have experience with leveraging? Any personal stories of failure, or success? Any investment advice (Roth RIA?)
Thanks in advance for your help guys.
I joined the US army in 2005, had a great time, got filed into the reserves and started college. There I joined the ROTC program, did very well and have managed to earn a commission as a 2LT active duty- I'm hoping for Vicenza, Italy 173rd airborne brigade, but that's not really the point of this post.
The point is, that USAA offers a $25,000.00 career starter loan to all incoming lieutenants. It's a 2.99% APR (as I understand it, in this economy that's a screaming deal). I'm thinking very hard about taking this loan. I have no debt - I've paid for school out of pocket (not using my GI bill) by working three jobs (so no school loans at all), and the only loans I've ever had were car loans (paid in full, ahead of schedule). I have almost no credit history - and have only recently started using a credit card to try and rectify that.
I don't really need the money. I live very much within my means; however I have been toying with the idea of taking it out, and investing the loaned money.
The big things for me, or the big things that have been advised to me, are Gold, Silver, hard tangible assets (guns, land, houses, cattle) primarily - but a few people have recommended mutual funds. I've been told to steer clear of Bonds and CD's right now.
I was looking for opinions on weather or not this is a good idea or bad idea at all to try - weather hard assets are wise (Gold is $1,800 an ounce right now, will it really get much higher?) - I understand already that the entire idea is dangerous at best, but the possibility of return is something that has weighed heavily on my mind. Does anyone have experience with leveraging? Any personal stories of failure, or success? Any investment advice (Roth RIA?)
Thanks in advance for your help guys.
Lo Que Sea, Cuando Sea, Donde Sea.
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Use your own money to start a Roth IRA. Businesses can and do use borrowed money to buy risky investments, but people should not.
Let 'em eat fucking pineapples!
EDIT - and, if one were to do it, what would be the best course of action for investments?
Veritas; did you take out more than you needed? Could you not have taken the loan out in a smaller increment? Was it good for your credit history? Any advise about USAA? Is their insurance worth anything?
You can only take out $25k. But you can pay back as much as $25k the day after you take it out, like most loans.
So I took out $25k, paid off $12k of loans, gave back $8k at the earliest opportunity, and kept $5k in savings for "oh shit" liquidity.
Let 'em eat fucking pineapples!
As for more general advice, I think the idea of the loan is to use it for what Veritas did with it - to get rid of any higher-interest debt you may have accumulated before being commissioned. If you want to invest the loan, you should speak to a real financial professional, not random people on the internet. I'll just echo the general sentiment of the thread that it's a really bad idea for individual investors (at least ones that don't trade for a living) to use leveraged investements.
It sounds like your intent is to just take this money out in order to make a higher return than the interest. Unfortunately, that type of return is going to be hard to find in today's market without taking on additional risk or a very long time horizon (~10 years).
Beyond standard financial investing, there are other things that might be a good use of the money. For example, if you have a career you'd like to pursue that requires additional education, or if you're in need of a car in order to hold a job. Similarly, if you have a secure income and are looking to buy a home, then using the money to help with the down payment or to supplement the mortgage payments would probably net you some savings long-term because the rate is lower (although you must do the actual calculations to figure out if this is financially sound for you).
I don't think you're going to find anything that is exactly what you're looking for, though. Getting a good return will mean taking on the risk that you could lose everything, and be forced to pay more than $25,000 for absolutely nothing. For example, you could take the last idea I mentioned about mortgage rates and consider buying a "cheap" place with the idea of renting it out. Long-term, assuming real estate prices rise, that would give you a very nice return. However, that assumes that real estate prices will rise by the time you want/need to sell, that you will be able to hold a consistent renter, etc. etc. etc. As you can see from recent history, there's a chance that you could be left holding a pretty significant debt burden for a worthless piece of land that you can't even rent out, let alone sell.
The reason he's eligible for the loan is that he just commissioned as a Lieutenant in the military. Safe to say a lot of these don't apply.
Doubly so if this is your first foray into investing.
Triply so if you're entertaining buying gold.
You're debt free, that's an awesome position to be in, bro. Stay there. Save some cash and invest that.
"hard tangible assets .... guns" who the fuck said this? whoever they are stop listening to them
If you bought land, yeah, it's a good deal if you make a wise choice. That's real estate. If you guy silver or guns you're just stupid.
we also talk about other random shit and clown upon each other
(don't make a LT joke)
(don't make a LT joke)
Let 'em eat fucking pineapples!
As I said in the beginning - I don't really need the loan; for me it would be a rather big experiment in the use of a loan. I've conceded it's unwise to use loans, and that the entire idea of trying to make money off of money that isn't even yours is dangerous and possible very stupid, but there is a part of me, a tiny part, that is very intrigued by the idea of making money off of a loan with a small interest rate. This tiny part of me thinks a 3% loan might be small enough.
But wisdom is against me here. And I have yet to hear from anyone (in the current state of the economy) who has managed to do it.
I just have a hard time of killing that tiny, lazy, part of me that wants something, for nothing.
Give me your best! I love a good LT joke.
However, if you want to and can easily pay back the loan amount, grab a lower increment (say $10k) and go hog crazy in the market. Just steer clear of those "hard" goods you mentioned earlier. Investing in guns and cattle is horrid advice and you should never listen to this person again. Also, precious metals are a finicky market and should be avoided for beginners (this also includes ForEx - avoid currency).
Having gotten that out of the way, let's discuss investing with your own money.
DO NOT BUY GOLD. I work at a gold mine, the more people buy gold, the more secure my job is, and the more likely I am to get a payraise. DO NOT BUY GOLD. It is heavily over-priced. It might keep going up slowly for a few more years depending on the Glenn Beck factor, but it will definitely be heading back down not too long from now.
Do invest in long term secured funds, retirement plans and such. Avoid playing with imaginary sky dollars on the stock market, because you're basically gambling. For every Warren Buffett, there are thousands of people who lost every cent they invested.
Do it with your own money. Doing it with borrowed money is baking in a 3% management expense before you can break even.
One thing to keep in mind is that the purpose of this loan seems pretty clear - to help you further your own career and development. Are you considering a military career? Are you looking to eventually leave the military and look for a different career path? If so, are there technical skills or management classes you could take on the side that would help your prospects for advancement or movement to a different area that better fits your interests? For example, something as simple as a language class might be a good way to use this money.
Even something as simple (yet tangible) as a car to get to work or a good suit for a big interview would be a justifiable use of these funds if you believe they are necessary to advance your career or get the type of job you want in civilian life. These are the types of things you may want to consider outside of financial products that would be a good use of the funds.
Otherwise, I'm going to echo everyone else in this thread and say that you're better off just letting it sit there as an option should you need it down the line. Living debt-free is quite the accomplishment in this day and age, and there's no reason to destroy that record now just because you happen to have a cheap loan available.
My current favorite theory on the big motivator for the movement of gold prices is real interest rate, with low and below zero real interest rates pushing gold up a lot. The real interest rate being what you get when you take a nominal interest rate then remove out inflation, for those who don't know.
A lot of people talk about gold being a hedge against high inflation or hyperinflation, but low and negative real interest rates can happen at a wide variety of interest rates. We have been having a lot of negative real rates lately despite very low inflation due to the Federal Reserve holding rates down in the face of a depressed economy. It becomes a lot more attractive to hold gold as a store of value when you aren't going to lose out on interest or yields from something safe, especially if you would lose money in purchasing power terms by holding that safe investment.
The thing is, once the economic situation and real interest rates start changing around then gold will probably start taking a big hit, but as with most things in investing it isn't clear when that will happen. Gold ran up a bunch in real terms in the heavily inflationary period of the 1970s and 1980s, but I believe it got beat up really badly in the aftermath when the Fed ran up rates through the roof and clamped down on it.
Long story short, it makes sense to me why gold has run up a lot lately, but it is anything but a sure thing going forward.
Right now interest rates are low coming and going - would you rather borrow at 3, make 5 or just invest and make 3?
Esp. since in terms of retirement planning you've got military benefits in the plan, just stick it a stable place where it makes you some money and is still semi-liquid. a date-targeted fund for right around your planned military retirement would be an ok idea, and index funds are basically investing on autopilot.
I host a podcast about movies.
But since you don't have any loans to pay off right now, could you use this loan as a way to pay for a big-ticket item you need or want at a lower interest rate than you could get normally, like a car? With the trade-in from whatever you drive now, if you put another $10-15k toward it you can get something really really nice (by my standards, I'm poor :P ) that you can have for years, keep the majority of your savings intact, and have something you can use for years. A car probably isn't the only thing that falls into this category, it's just the only thing I can think of off the top of my head.
You are going to need at least a 3% return. Also, you haven't mentioned how many years the loan is for? I'm going to guess 10. But that is a really important piece of information.
But whatever, you go for it. You take the money out. You invest it in a mutual fund or something that has a pretty good rate of return and ok security. I mean, if the stock market crashes again, you are still SOL, but at least you won't do too much worse or better than the stock market as a whole. But nothing short of a mutual fund (at the least), is going to cut it. A 5 year CD at the highest rates you can find at sketchy online banks still only brings in about 1.6 percent. So mutual funds it is.
Well you still have to make monthly payments. And you'll be getting dinged with fees every time you withdraw from the mutual fund to pay them. Or you could just pay straight out of your income. That might help close the gap some. So you dump the 25000 in a mutual fund and walk away for 10 years (the duration of the loan) then pull it out. What do you get?
Hard to say. 10 years is a good span of time for things to level out. Looking around at various mutual funds I see 10 year return rates of around 7 percent. But that doesn't take into account any fees they charge you just for having it there. Sometimes its a percentage. Sometimes its a flat fee. The fees associated with mutual funds are the wild west. And it's best to find someone you trust who knows their shit to help point you to a good fund. And those people are hard to come by.
So, best case, you might earn 3% on your investment over 10 years? Which, if everything goes absolutely perfect for you, would be around $8000 10 years from now.
BUT, if things don't go well for you? Well I'd look towards being out at least half. As in being $12500 poorer than when you started this whole venture.
You will not find an investment with a guaranteed 5% rate of return.
Let 'em eat fucking pineapples!
You could easily lose money on your investments with such a short time frame. People your age should be investing with decades in mind, not years. Frankly, you won't make nearly enough if you invest conservatively to make it worthwhile (both for possible gain and risk) and you risk losing half the money or more if you're investing in risky enough assets to double it in 5 years.
USAA's auto loan rates are lower than the rate on this loan over the same term (a 5-year loan has a 2.49% APR). Assuming OP has good credit otherwise, he could probably do better than that at a dealer if buying a MY2012 car, even.
Ah, well, it was a thought.