Michael Port (00:05):
Hello and welcome to Steal the Show with Michael Port, a podcast from Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money and I’m joined by my very good friend, Matt Rzepka, the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners when it comes to finance. Now to be crystal clear, I’ve got no conflicts of interest here. I don’t stand to make any money at all from you if you take any of the educational information that shared on this podcast and do something with it. My company is Heroic Public Speaking, which I co-founded with my wife, Amy Port. We’re a public speaking institution based in Lambertville, New Jersey and we provide world-class training to aspiring and working professional speakers around the world. I don’t sell anything related to financial services. Matt, however, does, and you are welcome to hire him, but I will not be compensated in any way if you do. I’m doing this purely because I love the topic and most importantly, I think you need it. Everyone in our industry can benefit from learning more about business and personal finance. That’s it. Alright, today, we’re talking about debt. Specifically, how to reduce bad debt and use leverage to grow your wealth when appropriate of course. So let’s talk about debt. Debt, debt, debt, debt.
Matt Rzepka (01:45):
Let’s do it.
New Speaker (01:45):
I don’t know. I wanna feel like I wanna dress up as a clown and somehow like show it to everybody. It was like not a scary clown, but a really silly, goofy clown that we can kind of take some shots at because when you have debt, it has a lot of power over you. It feels really uncomfortable. It feels scary. It feels like you could be drowning in it. You know, even if it’s not that much, it still could be really heavy. And sometimes you just don’t even know what to do or where to start. And you just sort of sit there paralyzed. And you sit there paralyzed, certainly it’s gonna get worse because if the debt’s not getting paid, those interest payments are just gonna keep adding on to the overall total that you owe. So let’s just make a quick distinction between debt and liabilities before we go into how to resolve or reduce some of our debt. So let’s define debt and let’s define liabilities. Can you do that for us, Matt?
Matt Rzepka (02:42):
Absolutely. And this is an important distinction in my opinion, because it helps again, bring clarity to decisions that you make in the future. Because sometimes we get motivated around the wrong thing because, again, it’s not defined properly. So a debt is where you have a loan and your only ability to repay that loan is from income that you’ve yet to earn. Meaning I don’t have any collateral. I don’t have any assets to help me pay that loan or directly pay that loan. So credit cards, student loans, sometimes car loans. I think there’s a little bit of a looming debt problem that exists in a auto financing today because they let you roll any old balance from a car into a new car purchase, whether it’s new or used. So you might be very upside down, to where if you sold that car, you’d still owe money. So that debt is only gonna get paid back from your income. So when your income is your soul source to pay something back, you’re effectively mortgaging your future income. And that gets very, very dangerous very quickly.
Michael Port (03:40):
The other thing about debt is that it just keeps growing.
Matt Rzepka (03:45):
Yes.
Michael Port (03:45):
It’s like a fungus. If you’re not actually addressing it or paying it down, it just keeps getting bigger.
Matt Rzepka (03:53):
Especially the true debt, like the credit card debt.
Michael Port (03:56):
Yes.
Matt Rzepka (03:56):
Because they don’t force you to amortize your payments in a way where you’re paying it down. You can actually have your credit card balance is growing based on how much you pay. And then also if you’re additionally spending and you’re not paying down that spending, you could go from $2,000 to $5,000 to $15,000 in credit card debt without blinking an eye if you’re not real careful. So yeah, you have to be really careful on the terms and the repayment structures that you pick on those true debts and part of that’s predatory. The credit card companies know they’re trying to get you into those bad interest situations. A lot of times they might have to write that off if it goes really bad for you and you file bankruptcy. But there’s a game there that they’re playing and you wanna play the game to benefit yourself.
Michael Port (04:38):
Very often when it’s the banks, when you wanna buy a car, or you wanna buy a house, or you wanna buy a boat, or an RV, or anything else that you might decide to take out a mortgage for, or the credit card companies who might want to extend credit to you, the way they organize, their marketing is to act as if they’re doing you a favor. But really you’re getting the short end of the stick.
Matt Rzepka (05:08):
It’s part of their sales process unfortunately.
Michael Port (05:11):
Exactly. And so one of the things I think is important is anytime you’re gonna go into any situation where you may be taking on some sort of loan of some kind is, you gotta read every single word in the agreement. And if you don’t understand it, you gotta get in front of an attorney who does understand it because the banks are not doing you any favors anytime they’re offering you any kind of money as a loan or as credit.
Matt Rzepka (05:40):
Well, yeah, and the banks they’re always adding provisions. There’s probably a lot of people who are signing loans for investment real estate right now that don’t know they have what’s called an assignment of rents in their loan agreement. So if something goes sideways, the bank can effectively take over the rental income from your property if you still owe the bank money and then they control the rent and not you. So again, you have to look at all the provisions in there. Now you might not be able to get that bank loan if you don’t sign that agreement, but you at least need to be aware that that could become a change in direction for how that investment property works if something goes south. You just gotta be in the know on what the bank can and can’t do from your perspective.
Michael Port (06:21):
Yeah. And that is true to almost all aspects of the personal finance industry. It’s really important to understand how is the person and/or the organization that is selling this product, being compensated. What are their interests and are those interests in line with yours? And for almost anything that has debt associated with it, generally their interests are not necessarily gonna be in line with your interests. You know, it doesn’t mean that you’re not gonna find good people in those fields, but just understand the business model that you’re engaged in. So any other examples of what we would consider debt? So we got credit cards.
Matt Rzepka (07:03):
Yeah. Credit cards, student loans, personal loan unsecured, something that doesn’t have collateral basically. Or a collateral that is losing value over time, like a car or an RV. So those go down in value. Right now in the RV space, that’s pretty popular thing with the pandemic and with COVID, where people are buying recreational vehicles. Well, you can finance a recreational vehicle over a very long period of time, but that vehicle value is gonna drop significantly faster than how you’re paying your principal on your loan. So again, you can have true debt there pretty quickly because your loan balance is very much higher than what your value of your vehicle is.
Michael Port (07:40):
That’s right. So what would you consider a liability?
Matt Rzepka (07:44):
A liability is the opposite. We have direct collateral and hopefully we have collateral that if we needed to get rid of that liability, we could use the collateral. So, you know, a house is the easiest scenario. Some people say, well, I have a mortgage. So I’m in debt. I say, no, I think you have a liability. Well, why, what do you mean? Well, if you needed to pay that off, you could sell your house. You just have to then figure out a new housing arrangement. So that liability is collateralized by your home. So it’s a liability and not a debt in my opinion.
Michael Port (08:16):
But to be fair, you can get upside down on that kind of liability also.
Matt Rzepka (08:21):
We hadn’t prior to 2008, really envisioned the world where you could be upside down in real estate or in your home or in your mortgage. And certainly we saw that it’s possible. And even with what’s going on in the real estate market right now, I think it could be possible again in the future. Hopefully not to the degree of what happened back then, but you certainly need an awareness of even those more hard assets as I would call them can still lose value and you can still get upside down. But if you make the purchase and have a mortgage payment based on something that you can fit into your budget, doesn’t really matter what the value of that is as long as you can keep making your mortgage payment. It only matters is if you try to sell or you have to sell. Try to sell versus have to sell. Hopefully you never have to sell any of your core assets because that usually means something bad is happening. That’s why all this planning and understanding and education is so important. You want to be in a position of control. So do you choose to sell? Not ever have to sell something.
Michael Port (09:18):
Yeah. So, you know, you may have some business liabilities, you may have borrowed money to expand an operation or produce a new product. And then hopefully the success of that product or operation will allow you to pay that loan back pretty quickly. And so that’s not unusual- pretty typical in business. I really prefer not to have much debt just in general. I haven’t had any kind of credit card debt for almost 20 years. That feels pretty good, but I do have a mortgage on our house. The majority of the house we own, and we still have a small mortgage on it. You and I have been talking about this is, you know, should we pay it off or should we keep the money that we would’ve paid it off with in the market, hoping to benefit from arbitrage of the difference between market gains and the interest rates.
Michael Port (10:07):
Our interest rate is about 3%, 3.1%. And you know, the last year has been very, very strong for the market. Our portfolio overall saw out a 32% increase and that’s a big difference. So that money working in the market is great. But of course, next year we might see a 30% loss. So we’d be upside down in that arbitrage if we were keeping money in the market rather than paying off the house. But one of the things that I was thinking about, I hadn’t really thought about it this way before is that if you are keeping a mortgage, but you are investing in the market rather than paying off the mortgage, that’s essentially leveraged investment money because you are using a mortgage. Let’s say you have a $500,000 mortgage on your house. You’re using your mortgage rather than paying off the debt. So that $500,000 that you have in the market, that’s the same amount as the mortgage that you have. That’s actually leveraged. You’re not free and clear with that $500,000 in the market because you do also have this debt on the house. Either way, it knocks down your net worth by $500,000, because either you pay off the house and that means you have $500,000 less in stocks or keep the mortgage and you have $500,000 more in stocks.
Matt Rzepka (11:22):
Yeah, because if you took the lump sum and paid the mortgage off, in order to get your $500,000 back into the market, you’d have to start making your mortgage payment again into your investment account. So again, it’s lump sum investing versus cash flow stream investing. And then anytime you’re borrowing against your house, there are restrictions and limitations that you have to be aware of. Most places will not let you take cash out mortgage on your home and put it directly into the stock market.
Michael Port (11:46):
That’s actually interesting. I wanna touch on that because…
Matt Rzepka (11:48):
Yeah.
Michael Port (11:48):
…I wasn’t even thinking about the regulations that you just mentioned. I was just thinking, okay, if I had a fully paid off house, my house is worth 1.2 million and it’s fully paid off, would I take a HELOC? Would I take a loan against this house to take that money and put it in the market? And I wouldn’t. I wouldn’t do that. So keeping a mortgage on that property is similar to that.
Matt Rzepka (12:13):
Yeah. Your only difference HELOC versus mortgage is amount of interest. So HELOC is generally gonna be a little bit higher interest rate and the HELOC also has variability in it. So then you add new components of risk to those transactions. The thing I like, especially in today’s world that we’re living in with inflation, about a long term mortgage is you have a guaranteed fixed rate. So that fixed rate cannot go up as interest rates go up in the future. So the example I usually give people just for context again, it’s your decision, you need to understand these measures to then make a good decision for you. But so if I have a mortgage at 3% right now and I choose to pay it off and let’s say I didn’t accumulate all that capital back as quickly. And the next thing I know, mortgage rates go up, interest rates go up and all of a sudden you can get 5% or 6% in a CD, or 7% in an I bond, or whatever it is that you’re out there looking for.
Matt Rzepka (13:10):
The only way to get that money back out of the equity of my home is to remortgage it. Well, they’re gonna remortgage it or HELOC it to you at the current rates. So you’re not gonna be able to have that money available to you to take advantage of those increased rates in the future. So it is a big game, unfortunately, that you have to think about and understand, and you wanna make sure you have the right of amount of risk and the right amount of comfort around what you’re doing. But the interest rate game that’s played there gets complicated in a hurry.
Michael Port (13:40):
Yeah. Before we move on to our next topic, I think I’d just like to say, maybe just recognize and appreciate the fact that the way that our society is designed, is set up, from a systematic perspective, we’re all taught that debt is perfectly fine and normal and that everybody has it. And if you want something, you don’t have the money for it, well, you can borrow for it. And that’s perfectly fine. I mean, you can go to a website now and they’ll let you do three payments for a pair of jeans. It’s built in everywhere and they’re gonna charge you more for those jeans as a result. I think that if you’re borrowing money for consumer purchases, you’re gonna get yourself into trouble. Yes. If you’re borrowing money for well thought out business initiatives, investment purposes, where you feel like the arbitrage works in your favor, you’ve done your research. You know, that’s maybe something to consider, but it’s a totally different category than the kind of consumer debt that most people rack up. In fact, household debt in the U.S. Reached a record $14.6 trillion in 2021 and 340 million people hold that debt of $14.6 trillion dollars.
Matt Rzepka (15:01):
Wow.
Michael Port (15:02):
That’s a pretty big number.
Matt Rzepka (15:03):
That’s a really big number.
Michael Port (15:05):
So we wanna reduce it. So let’s say we do have some debt. Well, we know we started with the budget so we can budget and we can now start to give some of our money a job of paying off this debt, of actively working to reduce this debt. What would you do next? How do you decide how to proceed?
Matt Rzepka (15:21):
Yeah. So there’s a great strategy called a snowball method, but I want to touch on two quick things before I explain what that is. Borrowing money, generally, t’s good to borrow money for leverage if you think what you’re borrowing it for or against is gonna appreciate in value or generate more income for you. If it’s not gonna do one of those two things, it’s more of a consumer borrowing. It’s probably gonna cause more problems than it’s worth. So that’s just a simple way to think about, should I, or shouldn’t I borrow this money? Is the asset gonna go up in value or down? Or can I somehow generate more income for myself by using that leverage? So those are just two basic metrics to think about before making any of those decisions.
Michael Port (16:01):
And also the risk…
Matt Rzepka (16:02):
Yes.
Michael Port (16:02):
…associated with any type of investment must be considered because I’m not gonna go borrow a million dollars today and put it into Dogecoin.
Matt Rzepka (16:11):
No, some people are doing that right now.
Michael Port (16:12):
That’s the problem. Exactly. So when you have these speculative markets or, you know, you see people do this with gambling, I mean, that’s how the gambling circuit works. They have someone stake the gambler, the poker player for however much it costs. And then the poker player gets a little bit of the winnings and the investor gets the big piece of the winnings. But if that gambler loses, well then whoever staked them or backed them, is out of luck.
Matt Rzepka (16:35):
Yep.
Michael Port (16:35):
That’s an underworld thing that happens all the time, but that’s how it works for anything that has risk associated with it.
Matt Rzepka (16:42):
Yep. So if you have debt or you just want to get outta debt in general, there’s something called the snowball method, which is a great simplified way to start tackling this problem and start proving your situation. Simple process of listing out who you owe, how much you owe, what the payment is, and the interest rate isn’t that important, but I would always encourage you to list that as well. So you just create a list of who the loan is to, how much you owe what the payment is and what the interest rate is. And the number one goal to start the snowball method. Once you have all the loans, debts and liabilities listed, is you take the smallest balance and you target that one first. Doesn’t matter the interest rate. Doesn’t matter anything else because the number one goal or gain that you’re trying to get when you’re trying to reduce debt is cash flow.
Matt Rzepka (17:31):
So by getting rid of one of those small loans, now you have a payment. So let’s say you owed $2,000 to a credit card company and the minimum required payment was $300. If you get rid of that $2,000 balance, now you were previously having to pay $300 every month on that credit card, now you have $300 freed up. So what you do is you take that $300 and you add it to the next smallest balance. So if that small balance minimum payment was $350, well now you’re paying $650 on that next balance. And then when that balance is done, you’ve got $650 to roll into the next one and so on and so forth. And that’s how you start to snowball the debt in that situation. And that, if you have credit card debt, I don’t know a better way to get out credit card debt than that. Now you have to do a budget at the same time, or you’re gonna end up back in the same place. But that snowball method combined with some budgeting can really put you on track faster than anything else.
Michael Port (18:30):
This may take some time for some folks.
Matt Rzepka (18:33):
Yes. You’re looking at a process depending on how bad the situation is, that can be anywhere from 3 to even 9 years, 10 years. But if you get your budget dialed in and you make some concessions around, Hey, this is important to us, we need to fix this to get back on track. We can cut in these areas and stay communicating, working together on it, to make sure that we’re living the way we wanna live to fix this issue. You can usually accelerate it in some really exciting ways if you can get that line of communication open
Michael Port (19:04):
For some people it may be quicker. Yeah, but I really love what you’re saying is that if you’re on the same page, if you’re doing your budgeting, you start getting excited about working through that debt. You start making choices. You say, you know, we really don’t need a night of drinks with the Smiths. They’re not even fun to hang out with anyway. So let’s just put that to the credit card. Or you decide to start to change some of the way you do socialize. So instead of going out to a place where they charge you $17 a drink, you have the Smiths over for a glass of wine at your house and you buy a great bottle of wine for $10 or $12 bucks because you don’t need the fanciest wine in the world. Often you get a great $10 or $12 bottle…I don’t actually know anything about wine. I’m just saying…most of the people that I know…
Matt Rzepka (19:50):
It’s more about the people than the wine. That’s the key.
Michael Port (19:52):
Yes. Thank you very much. I don’t know anything about wine.
Matt Rzepka (19:55):
Well, and we said earlier, you know, one of the most powerful things for your future is how much money you can save. So if you do that inventory of your loans and you look at how much monthly payments you’re making right now, and you can fix that, and all of a sudden those monthly payments become monthly saving. That can be exciting and liberating. And it just cause so much positive for your future. If you can get onto a path like that, if you’re in a tough situation. It gives you some clarity and some vision about, Hey, here’s where we’re going.
AD BREAK (20:24):
So, you know what I’d like to do. I’d like to take a quick commercial break because this episode of Steal the Show with Michael Port is brought to you by this podcast’s namesake, my book, Steal the Show. Now Steal the Show wasn’t the book that started it all for me, that was Book Yourself Solid back in 2006. And it isn’t my most recent book, that’s The Referable Speaker. But it is the book that inspired this very podcast and remains a favorite for many. Everyday there are moments when you must persuade, inform, and motivate others effectively. Each of those moments requires you to play a role to heighten the impact of your words and to manage your emotions and nerves. Every interaction requires communication skills. Whether you’re speaking up in a meeting, pitching a client, walking into a job interview, or reading ad copy on a podcast- like I’m doing right this second. Steal the Show will teach you how to make the most of every presentation and interaction. You’ll see how the methods of successful actors can help you connect with inspire and persuade any audience. You’ll learn key strategies for commanding an audience’s attention, including developing a clear focus for every performance. Making sure you engage with your listeners and finding the best role for yourself in order to convey your message with maximum impact. Who knows, maybe it’ll even inspire you to start a podcast about what you love. A Wall Street Journal, USA Today, and Publishers Weekly best seller, Steal the Show is available at Amazon, Barnes and Noble, and wherever else books are sold.
Matt Rzepka (22:10):
Michael, I love that ad and really just wanna make my own comment of our long relationship, our friendship, your amazing company that you and Amy have built at Heroic Public Speaking about persuasion and learning a lot of these techniques. And not only that you teach your students those things, but you teach that it’s not meant for trickery. It’s meant to find your true, authentic self and that when you fully express what you believe and what you’re passionate about, that’s when you can start to make people see and believe the same things that you believe and help them and see them grow and just get great return out of the educational investment. So I just wanted to make sure I specially pulled that out because it was so impactful for me, not only personally, but also to see you teach that on a regular basis to all of your students. I just love it so much.
Michael Port (22:59):
Oh, thank you so much. You know, we get a lot of compliments for having integrity, which always strikes me as odd. I appreciate it. And I always say, I really don’t think that’s something we should get a pat on the back for, to me that should just be par for the course.
Matt Rzepka (23:13):
Should be the norm.
Michael Port (23:14):
Yeah. You know, if you wanna play, that should be the norm. But I understand. Unfortunately it doesn’t always work that way. And certainly doesn’t always feel that way, but I just think it’s much easier to do the right thing because you stay true and straight.
Matt Rzepka (23:29):
Amen.
Michael Port (23:29):
So can we talk a little bit about how we might be able to reduce our mortgage costs? Let’s say we wanna pay off our mortgage more quickly because we wanna save money on the interest that accrues over time. Cuz you know, you might end up paying twice as much for a loan for a house if you pay it out over the full term of the loan, then you would, if you paid it back faster than the term of the loan.
Matt Rzepka (23:57):
Yes. There’s a big topic of discussion around this and this strategy. The one thing we always have to keep sight of is, and we you’ve already hit it a little here today, the opportunity cost other side of that. So if I’m gonna accelerate my payments, what could I have otherwise done with that? But at the end of the day, you have to do what’s right for you. So if you want to accelerate a mortgage payment, there are multiple ways you can do it. You can make extra payments every single month. You can make extra payments more than one time a month. You can make extra principal payments at the end of the year, they’re all gonna have a different component or different impact on the interest calculation. My favorite way to do this is to set up a side fund and put the money in a side fund first.
Matt Rzepka (24:39):
So I call it have a 30 year mortgage that’s paid off in 15 years. And this is less powerful than it used to be because most people today are not itemizing their deductions because of the tax law change from 2018. But when you used to itemize your deductions and your interest was additional tax benefit, you could get the tax deduction of a 30 year mortgage and the payoff of a 15 year mortgage. But you just set that money aside and, and do what I call writing one check. So in the 15th year, if I put the right amount of money in the side fund, I can write one check and pay off my mortgage. Again gives you more control, gives you a safety net. If something goes wrong during that process. That’s the one thing I don’t like about extra payments is once you’ve given that money away, the bank controls, whether you get access to that equity again because you’re truly just improving your equity position for your extra payments that you make. So again, no right or wrong answer here. And there’s a lot of topics and information that you can research on your own out there. My encouragement would be to understand control, understand access to capital, and understand opportunity costs and make the best decision that’s right for you.
Michael Port (25:48):
Now you mentioned you’re increasing your equity, and you mean in the house, because of course a house is not a fixed income unless you’re making money off of it, but it still is in the category of fixed income rather than an equity or a bond position in a portfolio.
Matt Rzepka (26:08):
Yes, in theory, you should have significantly less risk of valuation fluctuations in a home than say a bond or a stock for sure.
Michael Port (26:15):
Typically. So do you include the equity and debt that you have in a house when you’re thinking about the asset allocation for your overall portfolio or do or you keep it, set it aside as if it’s not relevant?
Matt Rzepka (26:32):
I personally set it aside because with housing that you live in personally, your true value, if you go to sell that home, in my opinion, is only what somebody else is willing to pay for it. And you don’t know what the market’s going to be at that time. When you look at investment real estate that has income, you can value a cash flow stream to determine the value of something, but the person who’s buying your personal residence, it’s all based on their assets and their personal income and whether they can afford or not afford to buy your home. So I don’t like to include it in the overall asset allocation. Still an asset, it’s still there, we may use it in some capacity later in life or sell it and downsize. So it’s still part of the conversation, but I use that differently.
Michael Port (27:16):
Mmm. Yeah. It’s interesting. Cuz one could theoretically think of it as part of your overall portfolio and might allow you to reduce your bond holdings and increase your equity holdings with a potential for higher gain over time. You increase the beta, the market risk, cuz you’re gonna have more equities at exposure, but you could, I suppose, theoretically, do that and think about it that way.
Matt Rzepka (27:40):
The other strategy that is kind of one of the thought after dirty words is a reverse mortgage or a home equity conversion mortgage is what they call it now. And this unfortunately is likely gonna be needed by a lot of Americans who plan to retire in the next 5 to 10 to 15 years because savings rates have not been super high historically for our citizens. And that equity that they have in their home, they may have to tap for their retirement. And it actually is a great tool. I am a fan of reverse mortgages of course in the right situation. And one of the reasons I like it is it’s technically a loan. So it’s tax free income and it’s guaranteed by the government. The stigmas that exist around reverse mortgages are not always what people think. So if you’re worried about your retirement, it is something that you have to go through a ton of education to even do a reverse mortgage.
Matt Rzepka (28:32):
So it’s a slow process, but again, just different ways to use that equity. If your kids don’t want your house after you’re gone, I would certainly encourage you to think about how equity and tax-free money from that equity can play a role in your retirement.
Michael Port (28:46):
Yeah.
Matt Rzepka (28:46):
So again, just unique tools in the market that are really cool. That again, every time I bring up that word in a meeting, I can see the facial expressions of, oh my God, what did you just say? And it’s okay. Cuz I just say, look, I’m only here to educate you around this. I don’t sell reverse mortgages. I don’t make any money from reverse mortgages at all. It’s just a tax tool and an income tool that you need to be aware of. Cuz what I wouldn’t want is you to wake up at 70 or 75 and say, why didn’t we do that at 62, which is when you can do a reverse mortgage. Yeah. So again, it’s just information.
Michael Port (29:18):
Yeah, I guess for me, I just don’t like the idea of having to pay so much interest for something if I have the ability to start paying down or paying off and full that loan. Because when you buy a house, you usually think of the sticker price, whatever you end up settling on in the negotiations. You go, oh, that’s what we paid for the house. But only if you’re paying cash.
Matt Rzepka (29:42):
Yes.
Michael Port (29:43):
If it’s a mortgage, I just pulled up a mortgage calculator here and I just made up an original loan amount of $500,000. And I said, the date of first payment is today. And the loan length is 30 years at a 3.0% interest rate, which will not last for long because…
Matt Rzepka (30:00):
No.
Michael Port (30:00):
…we know we’re gonna see a few interest rate increases in 2022. The Fed has just announced it, but I’ll leave it at 3% just for fun. So that principle plus interest is $2,108.02. Now that’s without taxes or insurance, it’s just the loan itself.
Matt Rzepka (30:18):
Principle and interest. Yep.
Michael Port (30:19):
That means that the $500,000 loan over 30 years is gonna cost you $758,887.30.
Matt Rzepka (30:28):
Yes sir.
Michael Port (30:29):
So you’re spending an extra $258,000 on that house in order to pay it off over 30 years rather than, you know, paying it in cash. And most people don’t have that kind of cash to put down on a house. But we really, I do think have been programmed to believe that we should buy houses at the earliest possible moment because that’s the American dream. It’s a great investment. And the fact of the matter is residential homes are generally not a great investment. Even if you get a couple percent return on that house per year, the amount of money that you’ll put in it over time is generally gonna eat into that.
Matt Rzepka (31:01):
Yeah. When you really add up all the costs of owning a personal house, you have to get a pretty significant annual inflationary bump to keep up with those costs. Yeah, because there’s no income component to it. It’s just an asset that you’re dumping money into over time. And when you really factor in that money that you’ve put into it, unless you’re in a super highly appreciating market or some other places where there might be an exception to that. The cost of the house usually barely keeps up with inflation.
Michael Port (31:31):
And most people think they can market time the sale of their house, but they might find that they can’t. They have to sell for some reason and the market is not in their favor, so it can be problematic. So imagine, so you had to pay $250,000 extra dollars, which if you didn’t have to pay to this house, you could buy a second house at a lake somewhere for $250,000. But if I think you don’t have the money for the house, then renting is a perfectly reasonable option. If you wanna buy the house and buy a mortgage. That’s great. But think about, if you could add a little a bit extra to it.
Matt Rzepka (32:04):
You still have the $500,000, 30 year, 3% open, right?
Michael Port (32:07):
Yes I do.
Matt Rzepka (32:08):
What’s the total principal and interest at the end of that 30 years?
Michael Port (32:12):
$758,883.
Matt Rzepka (32:16):
Okay. So that would be, if you financed it at $500,000 made all your payments paid all that interest. Let’s say I had the $500,000 before we do the, your payments. I always like to do this.
Michael Port (32:25):
Yeah.
Matt Rzepka (32:26):
Should I pay cash? Well, I know that it’s gonna cost me that if I finance it. If I think I can get 5% annually over that same 30 years, my $500,000 at 5% growth over 30 years is worth $2.1 million. Now again, risk is always a conversation that has to come into that. But that’s the opportunity cost side of it. And part of this too, which is what we’re talking about here, you have to do what is gonna mentally and emotionally work for you.
Michael Port (32:55):
Yeah.
Matt Rzepka (32:55):
So if you’re saying, look, the house is the number one goal for me and I can’t do anything else because that just feels like too much risk to me. Then you have to do what you’re gonna do well. Don’t try to do something that you’re not gonna be able to stick with. So just a good point to think about.
Michael Port (33:09):
Yeah, absolutely. And of course there’s taxes that one would have to pay on that, on their earnings.
Matt Rzepka (33:15):
Yep.
Michael Port (33:15):
But let’s say you decided you’re gonna pay an extra $1,000 a month. Remember the original payment would’ve been $758,887? With the extra payments, it comes down to $640,398. So instead of an original payoff date of November 2051, now the extra payment date is 2039. If you paid an extra $2,000 a month, well now you’re paying it off January 2034 and it’s only gonna cost you $596,921. So you see how with every little bit that you add to that payment, that’s going to premium, it reduces the size of the interest payment because as the balance gets smaller, the interest payment gets smaller. So your monthly mortgage fee stays the same, but more of it goes to principal because at the beginning of a mortgage, interest is the greater share of your monthly payment. Principal is the smaller share. But as the balance gets smaller, it changes. So that principal is the larger share of your payment and interest is the smaller share of your payment. So if you can kind of fast forward it to a smaller amount, you’re gonna save a lot on interest as a result.
Matt Rzepka (34:29):
And retirement goals, play a pretty big role in what you should do with some of those. If you’re on track with your amount you’re saving out of your income for retirement and you feel comfortable accelerating payments, and that you’re gonna hit your retirement goals, again a lot easier to do something like that. If you’re concerned about retirement and you accelerate the mortgage, the other thing I would encourage people to do is say, okay, well we went from 2051 down to 2035. So we cut half the time off the mortgage. Keep making your mortgage payment now because that money should start going into your retirement saving strategy if you’re not on target, because all it is is a cash flow commitment. So you have to figure out what all of those numbers are gonna look like, how and where you want to commit your cash flow that’s gonna get you to that best end target that you can.
Michael Port (35:15):
Nice. I’m just for fun putting $2,000 in here, just to show again.
Matt Rzepka (35:20):
Sure. While you do that, I always like to talk about the difference between a 15 and a 30 year mortgage too at the bank. And just ask people flat out. Banks are in business to make money, right? They offer you a lower interest rate on a 15 year mortgage than they do on a 30 year mortgage. Well, we all know just by this exercise we’re going through right now, the lower the payment term, the lower the interest, the less interest the bank’s gonna make. So if the bank sole purposes to make money, why do they offer you a 15 year mortgage at lower interest instead just require you to get a 30 year if they’re gonna make the most money from that product?
Michael Port (35:58):
Yeah. They want your money as fast as they can get it.
Matt Rzepka (36:01):
They want the cash flow. The bank is all about cash. Give me your money as fast as I can get it. And they throw this little carrot out there to incentivize you with a lower interest rate
Michael Port (36:10):
So that they can then take it and loan it to somebody else at a higher interest rate.
Matt Rzepka (36:13):
Yep. They’re all about leverage. They want to get that money back and re-leverage it over and over and over.
Michael Port (36:19):
Mmm. Well, Matt, we’re starting to come to the end of this episode and I’m wondering if there are any topics or concepts, issues that we haven’t addressed that you would like to address at time.
Matt Rzepka (36:35):
I think we’ve hit a lot of what is important here. Again, coming up with a plan and understanding your cash flow and your budget first, before deciding to do any of these things is really so critical. Whether it’s attacking debt, bad debt that you might have attacking liabilities. If you want to get those liabilities paid, saving more money for retirement. That’s also an area where I think some people jump in head first instead of feet first. They just say, okay, well I know I need to save for retirement. So I’m gonna put as much, I’m gonna put not 10%, but 20% of my check into the 401K plan. And then they run into a budgetary problem down the road and that money’s trapped in the account and they have a tax consequence or a penalty to fix whatever problem they have. Or they end up borrowing on credit cards at 15% or 20% and it starts to work against them. So follow the process in order, have a budget, have a cash flow plan and then make sure you understand the pieces as they continue to move forward. And what’s your exit strategy or safety strategy if something goes wrong.
Michael Port (37:37):
Yeah, Matt, what are we covering next week?
Matt Rzepka (37:41):
Next week, I am really excited to be talking about how we can turn your business into its own family bank
Michael Port (37:50):
And that’s something people should want to do, correct?
Matt Rzepka (37:53):
That is correct.
Michael Port (37:54):
Yes. It is something that I have done and has worked quite well. So thanks for listening and we’ll see you next week.
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