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Smart Financial Choices: Navigating the 2007 Cow Loan Options

MAJ Spencer Clouatre and MAJ Jon Byrom outline essential financial strategies for cadets considering the 2007 Cow Loan. Options include BLACK, GREY, and GOLD loans, with varying amounts and interest rates. Key advice includes maintaining a checking and savings account, creating a budget, managing credit card debt, and avoiding predatory lenders. Cadets should focus on the GOLD option for its favorable terms and establish an emergency savings account. The importance of financial planning and informed decision-making is emphasized for long-term success.

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Smart Financial Choices: Navigating the 2007 Cow Loan Options

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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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