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The 2007 Cow Loan

The 2007 Cow Loan. “Risk comes from not knowing what you are doing.” —Warren Buffet. MAJ Spencer Clouatre 102 Lincoln Hall x3559 Spencer.Clouatre@usma.edu. MAJ Jon Byrom 205 Lincoln Hall x2342 Jonathan.Byrom@usma.edu. The Basics. Three options from which to choose

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The 2007 Cow Loan

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  1. The 2007 Cow Loan “Risk comes from not knowing what you are doing.” —Warren Buffet MAJ Spencer Clouatre 102 Lincoln Hall x3559 Spencer.Clouatre@usma.edu MAJ Jon Byrom 205 Lincoln Hall x2342 Jonathan.Byrom@usma.edu

  2. The Basics • Three options from which to choose • BLACK: $20,000 @ 0.0% for 36 months • GREY: $25,000 @ 0.75% for 48 months • GOLD: $30,000 @ 1.0% for 60 months • Monthly payments • BLACK: $555.56 for 3 years • GREY: $534.74 for 4 years • GOLD: $520.43 for 5 years • USAA requirements to accept the loan • Maintain a checking account with direct deposit for duration of the loan • Maintain a savings account or credit card for same duration for overdraft protection • Contact Brian Kossler (Class Treasurer) for loan specifics • No outside vendors allowed on post—report

  3. Keys to Financial Success • Have a plan BEFORE you sign for the loan

  4. Create a Budget Goal: Use your cadet pay Credit Card Debt………………….$1,500 Class Ring…………………………$1,200 Commissioning Uniforms………...$2,000 Car………………………………….$20,000 TT&L on Car……………………….$1,800 1st Year Car Insurance……………$1,000 1st Apartment Furniture…………...$2,500 Total Expenses……………………$30,000 Remaining Value of Cow Loan….....$0

  5. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months)

  6. What does this mean? Real Interest Rates(Simple Calculation) Nominal Interest Rate – Inflation Rate = Real Interest Rate (–1.0%) – 2.0% (2006*) = 1.0% Real Return on Gold Option Investment: Real Rate of Return for Generic Mutual Fund = 5.0% Real Cost of Borrowing = (–1.0%) Real Rate of Return = 5.0% – (–1.0%) = 6.0% 1st Year Return = $30,000 x 6.0% = $1,800 Black & Grey Options $20,000 x 7.0% = $1,400 $25,000 x 6.25% = $1,563 vs. *Bureau of Labor Statistics; Nov 2005 - Nov 2006

  7. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months) • Pay off credit card / consumer debt immediately

  8. Why are Credit Cards so Bad? Initial Amount Charged: $5,000 @ 18% Total Pay Off @ 2% Minimum Payment. How long would it take? 472 months — (almost 40 Years) Total Interest Paid: $13,397 Total Pay Off @ $100 Every Month. How long? 94 months — (almost 8 Years) Total Interest Paid : $4,311

  9. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months) • Pay off credit card / consumer debt immediately • Don’t be a sucker!

  10. Steer Clear of “Sharks” • There are people looking to take advantage of you and your new-found wealth—including some “Old Grads” • These individuals are not allowed on-post (excluding Hotel Thayer)—there is a reason for that! • They are not stealing your money, but they don’t have your best interests in mind—what is their incentive? • What should you do? • Don’t be intimidated by their former rank—you are in charge • Ask for their credentials • Ask them how they get paid • Remove emotion from the equation—this is an financial decision • Don’t invest in things you don’t understand • Don’t purchase additional life insurance beyond SGLI (extreme exceptions) • Call me

  11. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months) • Pay off credit card / consumer debt immediately • Don’t be a sucker! • Establish an Emergency Savings Account • $2,000 - $3,000 (Recommended minimum) • Money market fund or savings account NOT linked to ATM card • Set aside $ for short-term expenses • Average ring costs $1,200 • Average uniform expense at graduation = $2,000 • Costs associated with living on your own upon commissioning • If necessary, use the Cow Loan to finance your automobile

  12. www.nadaguides.com Other quality auto sites: www.kbb.com www.cars.com www.autotrader.com Don’t forget TT&L!

  13. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months) • Pay off credit card / consumer debt immediately • Don’t be a sucker! • Establish an Emergency Savings Account • $2,000 - $3,000 (Recommended minimum) • Money market fund or savings account NOT linked to ATM card • Set aside $ for short-term expenses • Average ring costs $1,100 • Average uniform expense at graduation = $2,000 • Costs associated with living on your own upon commissioning • If necessary, use the Cow Loan to finance your automobile • Start saving for the long-term NOW—time is money

  14. The Value of Compounding Amount Invested: $96,000 Value at Retirement: $700,000 Value of Gold Option @ 8% Annual Rate of Return: 10 Years = $65,000 20 Years = $140,000 40 Years = $650,000

  15. What is an IRA? • Individual Retirement Arrangement (Account) • Arrangement w/ federal government • In return for bearing the financial responsibility for your family in retirement, the government provides you with certain tax advantages • Offered by virtually every financial institution • Think of it as a ‘bubble’ protecting your assets from taxes • Any investment instrument / multiple instruments fit in the ‘bubble’ (and these can change) • Contributions of up to $4,000 in 2006 & 2007; $5,000 starting in 2008 • Initial contribution can straddle two years ($8,000 now)

  16. Which Retirement Vehicle? • Traditional IRA • Deduct contributions up to $4,000 ($5,000 in 2008) from your taxable income • Earnings taxed upon withdrawal (NET age 59.5; NLT age 70.5) • Roth IRA • Contribution limits = Traditional IRA; no tax deduction at time of contribution • Tax free withdrawals NET age 59.5; no capital gains or dividend taxes • May be withdrawn early to fund education/home purchase • Thrift Savings Plan • Available to you upon commissioning • Similar to 401(k) plans for civilians • Contribute up to $15,000 • Give a choice of five funds or a lifetime fund • Money that is invested comes from pre-taxed dollars (lowering your taxable income) and earnings are not taxed until they are withdrawn • Begin withdrawing NET age 59.5 and NLT age 70.5 Roth IRA is recommended for young investors—YOU!

  17. Keys to Financial Success • Have a plan BEFORE you sign for the loan • Once you have a plan, most cadets should take advantage of the Gold Option ($30,000 @ 1.0% for 60 months) • Pay off credit card / consumer debt immediately • Don’t be a sucker! • Establish an Emergency Savings Account • $2,000 - $3,000 (Recommended minimum) • Money market fund or savings account NOT linked to ATM card • Set aside $ for short-term expenses • Average ring costs $1,100 • Average uniform expense at graduation = $2,000 • Costs associated with living on your own upon commissioning • If necessary, use the Cow Loan to finance your automobile • Start saving for the long-term NOW—time is money • Diversification is the only free lunch you will get in life • Seek advice and adjust your investments based on changes in your financial goals, life events, and market events

  18. WHAT WOULD I DO? TWO SCENARIOS…

  19. More on this later My $30,000 Cow Loan Practical Car Max: $18,000 (Including TT&L) Emergency Savings $2,000 (Money Market) Pay Off Your Debt Roth IRA $4,000 (Mutual Fund / ETF Mix) First Year Insurance $1,000 Class Ring $1,000 (Money Market) 2LT Expenses $4,000 (Money Market or CD) • ADVANTAGES • Establish emergency account • Begin lifelong habit of savings • Firstie pay is spending money • DISADVANTAGES • Don’t have the coolest car depreciating in the lot • Have to wait until age 59.5 to get that $4K but it’ll be worth $69,000 @ 8%

  20. More on this later My $30,000 Cow Loan Car Mom & Dad Emergency Savings $2,000 (Money Market) Pay Off Your Debt Roth IRA (2 Year) $8,000 (Mutual Fund / ETF Mix) 2008-2010 Roth IRA $15,000 (CD or Mutual Fund / ETF) First Year Insurance $1,000 Class Ring $1,000 (Money Market) 2LT Expenses $3,000 (Money Market or CD) • ADVANTAGES • Establish emergency account • Guarantee 5 years of IRA savings • Earn interest on $15,000 • Begin lifelong habit of savings • Firstie pay is spending money • DISADVANTAGES • No Manhattan spending sprees • Have to wait until age 59.5 to get that $23K but it’ll be worth over $300,000 @ 8%

  21. Mutual Funds & ETFs • Built-In Diversification • Mutual Funds vs. Exchange Traded Funds • Active vs. Index Funds • Fee Structure (Load vs. No Load) • What would I do? • Basic investor • Target/Lifecycle 2050 Index Mutual Fund • Target Fund Link • Advanced investor • Mixture of no load, index mutual funds and ETFs based on deposit amount • 40% S&P 500 Index (moderate risk) • 25% Small Cap Index (moderate-high risk) • 20% Emerging Market Index (high risk) • 10% Sector, Region, or Strategy Specific (all risk levels) • 5% Corporate or Government Bond Mutual Fund (low risk) BUT HOW, YOU ASK?

  22. How to Get an IRA Started? • Don’t be intimidated—this isn’t rocket science • Online resources are plentiful, fast and easy • A typical Roth IRA with multiple mutual funds and ETFs can be established in under 30 minutes • Great examples include (but not limited to): • www.usaa.com • www.vanguard.com • www.fidelity.com • www.troweprice.com • Be sure to have: • SSN & Driver’s License • Last year’s tax return (maybe) • USAA Checking account # and routing / ABA # Every day you waste is tax-free cash (interest earnings) left on the table.

  23. IF ALL ELSE FAILS? CALL US… MAJ Spencer Clouatre 102 Lincoln Hall x3559 Spencer.Clouatre@usma.edu MAJ Jon Byrom 205 Lincoln Hall x2342 Jonathan.Byrom@usma.edu

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