- April 21, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Financial Situation of an O-1
I am an O-1 in the military with a complex financial situation. Currently, I have incurred $2k in debt due to moving around after BOLC. Despite this debt, I have no other outstanding loans or liabilities. Recently, I made a significant purchase of a 2023 car costing $25k. On the brighter side, I have managed to save up a substantial amount of $80k in savings, with an additional $7,500 in Roth IRA and $5k in investments.
## Considering a USAA Career Starter Loan
Given my financial situation, I am deliberating on whether to utilize the USAA Career Starter Loan to address my credit card debt, purchase furniture for my apartment, and possibly invest in my Roth IRA, investments, and High-Yield Savings Account (HYS). The loan is appealing to me as it offers low-interest rates, making it a feasible option for managing my financial commitments.
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Credit card debt needs to be paid off immediately (assuming it’s accruing interest and not on 0% promo APR status). That means pulling from the $80k (you didn’t mention what it’s tied to but I will guess stocks?).
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What’s the interest rate of the loan and interest rate of the car? This will influence the priority of what to do with the loan. Furniture isn’t an emergency and something you can buy over time with your organic income. I wouldn’t spend the loan on it. The loan should cover high interest debt, necessities that can’t wait, and the rest should be invested.
Yes, use the loan. You can pocket the 1.3% in a high yield savings difference into your account and build credit.
You shouldn’t get the loan.
The HYSA advocates are ignoring what’s called “interest rate risk,” or the possibility that the federal reserve lowers interest rates to be equal or less than the loan. And the thing is, you pay taxes on interest, so if interest rates fall to 3.4% as an O1 or 3.9% as an O2, you’re now just breaking even.
You also are suffering an opportunity cost to not investing the money you do have into investments that could make you more money. You don’t need to leverage a loan to do this.
What I’d recommend you do is:
1. Increase your TSP contributions to max it out for the year.
2. Take $10k of that $80k and put it into a money market fund.
3. Divide up the remaining 70k between a US stock index and tax advantaged municipal bond index fund, depending on your risk tolerance…. somewhere between 80 / 20 and 60 / 40. I’d recommend being more conservative until you hit O2 because you’ll have to make withdrawals as you max TSP. You’ll read a lot of advice on Reddit to go 100% stocks and diversify through international funds, and that advice is significantly higher risk than bond funds. The bond index funds here will have lower interest rates than a HYSA *but* 1) you owe no taxes on them except for the portion small portion that comes from your state of residency, which is practically going to be zeroed because your mil income is exempt and 2) they are more resilient to interest rate cuts…. in fact, they gain a lot of value if interest rates are cut.
I used 100% of my loan for the S&P500 and planned to skim the profits until I needed to pay it back. This was in 2007.
Yes. One of the cheapest loans you’ll get. Pay off loans & CC debt and just pay off Career Starter Loan.
I used that opportunity to get the loan, fixed our house and invested what’s left on CD’s that pays 5+%. 👍🏼
The $80k is in a HYS currently.
I bought the car so, there’s no car loan, but it took a hit for my savings. The USAA career starter loan has a 2.99% rate and needs to be paid off in 5-years so monthly payments are $451-ish.
What are you earning on your savings? If it isn’t high yield, just pay the $2000 from savings and move on. Frankly, considering your situation it feels like you are overthinking it.
Congrats on putting yourself in a good financial position!
Recommend *not* borrowing money to invest. “The way” to invest is live below your means and invest the earnings. Even a safe investment like a MMF, HYSA, CD, or T-Bill provides negligible return after taxes on a Career Starter Loan. Borrowing to invest also reinforces bad habits and bad ‘concepts’ about debt.
Invest the $80k you currently have before talking about investing borrowed money (or $78k and pay off your debt today.)
Going forward, You don’t need furniture sir. As an O-1 I’m surprised you aren’t just renting a single room and investing the rest. The most you need is a bed and pillow.
You have a unique opportunity to set yourself up for long term success financially. The best thing to do is take on no new debt and live a frugal lifestyle early in your career.