Rich on Money

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Investing with VA Loans – A Complete Guide

This post was originally published on August 8, 2018.  I updated, lengthened, and added a table of contents to it.

Investing in rental property with VA Loan is a tricky subject.  There are many rules that dictate how a VA should be used.  Investing with a VA loan, even in multi-family, is possible.  I will show you how to do it so you can get rental income.

The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.

You can’t just buy a home and make it a rental property without living in it first.  There is an occupancy rule I’ll be discussing.

You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.

Another possibility for investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units  for a short period of time.  When you move on to your next assignment, you’ll be able to turn the entire property into an rental property legally.

Let’s start digging into the details!

The first thing we need to understand is the occupancy rule.

Occupancy Rule

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TSP Loan – Should I Get One?

It is possible to get a TSP Loan.

But should you?

  • Couldn’t we use it to buy real estate and make a fortune?
  • Couldn’t we invest in the next hot thing, like an IPO, or bitcoin?
  • What about gold!?!

These are some of the questions we are here to answer today.  I’ve heard people suggest these very things.

I’m going to first explain how the program works, then explore how using it will impact your future retirement income (ouch). 

If you want the BLUF (Bottom Line Up Front) and skip the TSP Loan intro, click this section , just tell me if I should get it or not!

THE TSP LOAN PROGRAM

I’ll be abbreviating the TSP loan program here, but here is the source link from tsp.gov.

The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government. 

HOW IT WORKS

When you borrow the money, it comes out of your actual TSP account.  It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions.  It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions. 

As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account.  This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it.  You lose the opportunity for that growth.  More on this later.

Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you.  The interest, however, is not tax-deductible.

LOAN ELIGIBILITY

To be eligible for a TSP loan, the following must apply:

  • Employed by uniformed services or federal government
  • In pay status
  • Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
  • Have at least $1,000 in your TSP account not counting agency contributions and earnings
  • Have not repaid a TSP loan of the same type within the past 60 days
  • Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
  • Not had a court order against your TSP account

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Are Charles Schwab Index Funds the Cheapest?

Charles Schwab index funds fees are certainly among the lowest.

There is a fierce battle waging between the big firms for the lowest index fund management fees.

We can thank Vanguard for low fees overall.  I think they started kicking too much ass and taking too much market share, so Fidelity and Charles Schwab index funds took notice and started slashing their fees.

This has been nothing but good for investors.  I’ll have to keep this and other similar posts constantly updated, as prices are slashed among the big three often.  I’ll summarize the recent changes later.

INTRODUCTION OF INVESTING AT SCHWAB

charles schwab index funds

When you buy Charles Schwab index funds, here’s some of what you get:

  • Mutual Fund OneSource service funds and other No Transaction Fee funds are $0 for online trades
  • All other mutual funds cost up to $76 to buy and $0 to sell
  • Online stock trades are $4.95 per trade
  • Online Schwab ETF OneSource trade are free
  • Other ETFs can be purchased for $4.95 per trade

If you are going to buy Schwab index funds outside of the Schwab mutual fund family, definitely invest somewhere else.  Their fee for other mutual funds really makes it cost prohibitive (that means way too damn expensive!)

WHAT’S AWESOME ABOUT CHARLES SCHWAB INDEX FUNDS?

  • $167 billion under management in mutual funds and ETFs
  • 3rd largest provider of index funds (behind Vanguard and Fidelity)
  • No minimums to invest (This is an issue at Vanguard)

CHARLES SCHWAB INDEX FUNDS

I’m going to talk about the features and fees of the three most popular and competitive mutual fund categories.  Here we go!

S&P 500 INDEX FUND

Aaa yes, the benchmark of all index funds in my opinion.  It has a dear place in my heart as my main investment during most of my military career.

Just that.

Nothing else.

It is Warren Buffett index fund recommendation of choice.

EXPENSE FEE:                          .02%

MINIMUM INVESTMENT:      NONE

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5 Worst Financial Mistakes to Avoid for Military Members

Maybe you’ve made some of these mistakes military members make.

I made a few of these mistakes myself, but I’m still here today doing relatively well.

Let’s see how you measure up.

1. GOING INTO DEBT

I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.

It’s living large when you haven’t made that money yet.

Spending money you haven’t earned.  Otherwise known as… Keeping up with the Jones’s

The funny thing is, the Jones’s are going into debt to keep up with you too!

Here are some things that will really put you into debt:

Buying or renting much more house than you need

I see it time and time again in the military.  A married couple with one newborn buying a 4000 sq ft property.  Not sure what they will do with 6 bedrooms and 4 baths!

You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)

Having a new house custom built…

But it’s so nice to have a big house built to your specifications.  You deserve it!

Big houses need lots of things to fill them up.  They just don’t look right without expensive furniture and nice cars.  They are also expensive to heat and cool.  Good luck!

New or expensive cars…

Whatever you do, don’t buy a new car.  On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales.  You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.

I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.

Vacationing while overseas…

You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one.  You are in Japan, and it’s the perfect gateway to Southeast Asia.  Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas. 

Don’t overdo it.  Take advantage of existing geography and vacation in areas around you that you.  Try to drive there instead of flying, and try to Airbnb instead of hotels.

The cardinal sins of debt…

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The Best TSP Investment Strategy Out There

I’m sharing several options for investing in the TSP.

The Thrift Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services.

It is essentially like a 401K for military and civil service employees.

I’m not here to tell you which TSP recommendation is best, that’s a fool’s errand.

The only way to do that is to go into the future, see how things turn out, and then tell you which TSP asset allocation would have been ideal.

I will, however, give you the tools to make an informed decision about the best TSP investment methods.

Most of these TSP investments strategies should work well if you regularly contribute to your thrift savings plan, ensure you are getting matching if it’s offered, and stick with the same strategy over the long term.

I would caution against jumping back and forth between investment strategies every time you find something bright and shiny.  Many people erode their long term returns by “dancing in and out of the market.” (Warren Buffett)

First, it’s important to understand the five core funds inside the TSP and what they consist of.  This is important in understanding how they are used in building TSP investment portfolios.

THE FIVE CORE FUNDS PLUS L

  • The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market

  • The F fund is an index of world-wide government, corporate, and mortgage-backed bonds

  • The C fund is equivalent to the S&P 500 index.

  • The S fund is an index of mid and small-cap stocks not included in the S&P 500.

  • The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.

  • The L funds are professionally managed investment funds tailored to a specific time horizon.

Now we dive into each one a little more in depth before going into our TSP investment strategies:

The G Fund – The Government Security Investment Fund

Pros: No volatility and backed by full faith and credit of the U.S. government

Cons:  Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low

This unique investment is only available to TSP investors.  It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.

The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.

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9 Proven Ways to Boost Your Index Fund Returns (Video)

I’ll tell you how I’ve invested most of my career.

S&P 500 index fund.  That’s it.

But, shouldn’t I be able to do better than that?

This post will show you a data-proven way to boost your index fund returns.

PAUL MERRIMAN

Paul Merriman is a believer in index fund investing.  Additionally, he is a nationally recognized authority on mutual funds, index investing, asset allocation, and ran his own investment advisory firm since 1983.  Paul has been on Wall Street since the 1960’s.

He’s been preaching something called the ultimate buy-and-hold portfolio for the past 20 years.  His ideas aren’t revolutionary.  It’s very similar to Larry Swedroe’s research on small value stocks and their superior performance over long periods of time.  Moreover, he believes in the work of Dr. Fauna and Dr. French in regards to diversification to increase returns without adding risk.

With the ultimate buy-and-hold portfolio, we are going to keep the S&P 500 index, but only 10% of the portfolio, and then give 10% each to 9 other asset classes.

Most people say nothing outperforms the S&P 500 index over the long term. Well, that’s not exactly true.

Over the long term, 8 of the 9 asset classes we’ll be diversifying with have outperformed the S&P 500.  Consequently, the risk is also roughly the same.

So the main ingredient in this portfolio is still the S&P 500 index.  According to Merriman’s research, it has compounded at 9.3% between the years of 1970 to 2016.

Personally, that feels a bit high, but we’ll stick with his numbers today.  I’m more comfortable claiming a historic 7% rate.

THE ULTIMATE BUY-AND-HOLD PORTFOLIO

Portfolio 1

For the sake of explaining this portfolio, think of the S&P 500 index as      Portfolio 1.  To start, we will invest $100,000 into our portfolio today between the dates of 1970-2016 to illustrate the growth that would have occurred with each step of diversification over that period.

At 9.3%, $100,000 would have grown to $6.5 million.  No way I can live off that!  We’ve got to do better!!

Compound return:    9.3%

Growth:                         $6.5 million

Portfolio 2

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military millionaire

Seven Steps to Being a Military Millionaire

It is possible to retire a military millionaire?

It is.

I did it before retirement.

No rich parents, no help, wife didn’t work.

Can the average military member go from being in debt to military millionaire?

We all see websites and books from people who were deep in debt and somehow quickly made millions.

Maybe we should read their books or infomercials and try their methods…

A lot of that stuff is shady.

These gurus get rich off people looking for shortcuts.  Most that try the guru route fail miserably.

It often involves going into lots of debt or paying a lot upfront for a product or a course.

military millionaire

It also requires no common sense

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5 Best Places to Save Your Down Payment (Video)

Where should you save your down payment for a house?

There are tons of articles and blogs trying to answer this question.  I’m not happy with any of them.

I’ll try to answer this my way.

The Rich on Money way.

There are two main factors that will influence where you should invest your downpayment for a house.

The first is how certain you are in what timeframe you will need that money.  Are you for sure using it within the next year?  Not much of a reason to put it at risk.

Are you unsure if you will purchase something in the next several years, but want the option?

Maybe you should consider putting some of that money at risk instead of just letting it sit there not working for you.

The next factor is your risk tolerance.

Some people understand that by putting their down payment in the stock market or a mutual fund, they run the risk of either having it grow quickly, or the opposite, losing half or more of its value quickly.

Could you live with that tradeoff?

If not, go with the less risky options, even if you are not sure when you will purchase a house.

Also, there’s what I ended up doing in my life.

I’ll explain which one of these methods I ended up using for my money.

It’s one that could have backfired on me big-time, but luckily didn’t.

Let’s look at the least risky options first.

TREASURY BILLS

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The 10 Cheapest Index Funds to Supercharge your Portfolio

index fund fees

Where will we find the cheapest index funds?

UPDATE 2:  I’m updating this article to reflect new information coming from Fidelity Investments making significant reductions to the costs of their index funds on August 1, 2018 and changes to Vanguard’s fee structure on December 1, 2018.

Index Funds

Let’s have some index fund fun today.

Many in the Financial Independence Retire Early (FIRE) community  recommend VTSAX (Vanguard’s Total Stock Market Index) as the investment of choice.

Why is that?

It probably has something to do with the blog www.jlcollinsnh.com or the book The Simple Path to Wealth.

If you are in the Choose FI world, then you’ve heard of the Godfather of FI, Jim Collins.

You may know he is a huge fan of Vanguard as the mutual fund company of choice.

Why? 

Does it have the cheapest index fund fees?

Does it have the lowest investment minimums?

It turns out…

It does not.

Then why does he recommend it?

I’ll get to that…

One thing I did the first time I read The Simple Path to Wealth (I ended up reading it about 15 times as his editor on the book) was check all my current investments to find out if I was paying too much in fees.

I’ve always followed the simple advice of Warren Buffett.

Invest in index funds.

I don’t believe investors can or should try to beat the market.

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Why Timing the Market is a Bad Idea

Here are the headlines that I saw when I googled “stock market” today:

 

“Is a global recession led by a US Stock Market crash in the offing?”

“Dow slides as US stock market suffers worst week in two years”

“Chart analysts see bigger market pullback if interest rates continue to shoot higher”

 

These headlines are going to affect everyone differently.  Let me share with you how it affects me.  Normally, I would never read it.  But today,

I laugh at it.

It’s useless information.

Let me give you a little background on me.

I worked for Fidelity Investments as a stock broker while I was in college before I joined the military.  I’m an avid finance nerd and real estate investor.

I’ve studied the markets long enough to know that index funds are the smartest way to invest your money.  Trying to beat the market is pointless.

I also know that a lot of what you see in the financial media space is useless information.  They try to predict where the market is going.  When they get it wrong, they try to explain logically why they got it wrong, which ends up being the perfect definition of hindsight bias.

Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

Financial magazines, newsletters, cable programs, videos, it’s all meant to capitalize on either fear or greed.  A few weeks ago, it was greed.  The markets were kicking ass.

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