Real-Life Scenario: Debt Elimination

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4.3.26: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker 1:
Welcome back to the Federal Retirement Show. I'm your host, Val Majewski with American Benefits Exchange. And as always, really appreciate you taking the time out of your busy schedule to view our content, to view our show. I highly recommend if you like today's episode, go back and view all of the previous episodes that we have. We have over 170 of them now. It's all geared towards information that we believe that you, the federal employee that's looking for accurate information when it comes to your benefits and retirement situation, it's all geared towards you. And if there's a question that we have not yet answered, I highly recommend you reach out to us. We'll create an episode about it. We'll talk about your specific situation now using your personal information. As you'll see, based on the content we're talking about today. But if it helps you, we know it'll help other federal employees. So we want to share real life examples. We want to give out information that we think is going to be valuable. We want to give you some tips and some insider knowledge and all of these things that can help you better prepare both today and as you go through your working career and into retirement. So again, thank you for being here and today's content, today's episode, I want to talk about a real life scenario because we just got done with a series. And if you didn't watch it, I highly recommend you go back and view our previous, uh, 11 episodes.

Speaker 1:
It was the top ten mistakes made by federal employees. And we had a bonus episode, an 11th episode, talking about a few other mistakes, two other mistakes, but we're going to hammer home one of the mistakes in there. And it was eliminating debt. And one of the mistakes that I see federal employees make is not eliminating their debt prior to retirement, not having a plan to tackle or eliminate their debt along the way. And I want to share with you a real life scenario. Federal employees that are utilizing concepts that we've talked about to eliminate their debt and the biggest debt that they have, their mortgage, and the whole idea with eliminating debt prior to retirement or eliminating debt in general, the quicker you can get rid of your debt, especially if it's high interest debt. And we'll talk about credit cards, we can even talk about a mortgage or car payments. And you might be thinking, wait a second, I don't have high interest on my mortgage. My mortgage rate is, you know, 3%, 2.5, whatever. I'm going to shed some light into that in just a second. But getting rid of those debts, uh, in a fraction of the time, getting rid of those debts prior to the, the debt, you know, regular payments, if you will, accelerating the payoffs, what it can do for you. And that all that revolves around is saving interest and getting rid of those payments.

Speaker 1:
Now, first of all, let's talk about interest. Why? Why eliminate debt quicker and save on interest? Because the quicker you can eliminate the debt. The principal of the debt getting getting rid of the debt entirely, not just the debt payment. The less interest you pay. Now what is interest do for you? In this case it does you nothing, right? It's money that you can light on fire. You can throw it in the trash. It's make somebody else money. Now, the reason why you took out that money, right? The reason why you took out a mortgage is because you didn't have the money, probably in the bank just to pay straight cash for it. The reason why you put the money on a credit card. Maybe you didn't have the money to pay for it entirely, so you're going to pay it down over time. The reason why you took the loan out for the car, most likely, is because you didn't have the cash just to write a check or, you know, hand the cash over to the the folks at the dealership to pay for it. So you take out a loan and with those loans, there's payments. And with those payments, there's interest. And that interest is making somebody else money because you couldn't buy it up front. So now you're going to have to make those payments over time. And that's the agreement that you made.

Speaker 1:
But understanding how that interest works and how it affects you over time. We're used to just making these payments. But what if we can get rid of them sooner? What if we can save ourselves tens of thousands of dollars in interest over time by having a plan to pay off our debt sooner? And that was a situation that I came into recently, talking to some federal employees who are looking to pay off their mortgage. And it wasn't by using their thrift savings plan. You might be thinking, oh, sure. They, they, they just took some money out of their TSB and they paid that off. No, it was by utilizing a plan, uh, a concept that we talk about here at American Benefits Exchange that helps people pay off debt faster and in a better way than just making regular payments or over payments and have more flexibility and control with their debt. Now. It's a pretty cool example and an awesome scenario. So keeping identities safe, I'm not going to tell you specifics about the names and everything like that, but I'm just going to I'm going to create a fictitious scenario for you. And we're going to see how this works. And I'm going to be telling you numbers. So if you're taking notes, you can jot these numbers down. You can fact check me on it if you want. But these are round about numbers and pretty accurate if you ask me.

Speaker 1:
Um, because I'm not not looking at somebody's exact mortgage statement or things like that, but I just want to share with you the concept of paying off your mortgage or paying off any kind of debt. This way, I'm going to use a mortgage as an example because it's probably the most drastic thing. And you're saying, well, earlier I mentioned high interest being mortgages. And it is true to a point. Now as far as percentage, your mortgage rate might be pretty low, but how does that actually work and how does the payment actually work? And if you look at your payment, are you really paying that smaller or what you think is small interest on your, your mortgage amount on your loan amount? For example, if you had a $400,000 mortgage, let's say you bought a $500,000 home, you put 20% down, you had a $400,000 mortgage and you had a 2.99% interest rate. Pretty low, not by today's standards, right, because interest rates are higher than they were. But let's say you got them when they were really low, 2.99%. What would your principal and interest payment look like? And these are general numbers. It's going to depend upon the situation that you're in. But your principal and interest payment would be nearly $1,700, $1,700, $400,000 mortgage, 2.99%, $1,700 mortgage payment 1700. Now, what would it look like? Let's say we were ten years into this. So I'm not going to say the most drastic thing in that.

Speaker 1:
Um, what what is the interest that you're paying initially? Because if you look at that payment, the bulk of that $1,700, when you first get into the mortgage, the maybe 80% of it, 90% of it, depending on the situation is going towards interest. Very little is going towards principal. But let's fast forward ten years. Ten years. How much of your $1,700 a month payment would be going to interest versus principal ten years down the road, $1,700. So if I just did some some quick math here, and I'm just doing this on the fly with you too, because I wanted to go through this in real life example, right? So $1,700 a year is $20,400, right? Times ten. You do that for ten years. You paid $204,000 into this mortgage of 400,000. So you would anticipate that probably your balance, Your principal remaining hopefully is, you know, closer to 200,000 than it is higher than that. And that's not the case. So 1700 a month over ten years, over $200,000 paid into it. And how much principal is left on your mortgage? Over 300,000 is still left. Over 300,000. About 301,000 is left. You've been paying a lot more to interest than you had in tackling your principal. Now, even after ten years, if we're looking at the breakdown, if you're still following me, of the $1,700, $750 of that is going to interest, $750 is going to interest still at this point, ten years in, that's a significant amount of interest.

Speaker 1:
If I look at this 750 divided by 1700, that's 44% of my overall payment is going to interest. So where's the 2.99% and how does that work? Now That's a totally different discussion of how they calculate all the payments. And, you know, it's front loaded for interest and all that stuff. So of all of your payment, even today, after ten years, 44% of it approximately is going towards interest. That's a lot. And again, what did I say interest was? It's not it's not decreasing your principal. It's not money that's making you money. It's making somebody else money. It's money that you can light on fire. You can throw in the trash. So what if there was a better way to do it? What if there was a better way to tackle this mortgage balance, and we may not be able to eliminate it completely? Like if you had the cash, great. If you had the cash. In an ideal situation, pay it off and you're going to save yourself tens of thousands of dollars of interest. Future interest payments that you would have paid over the next 20 years if you would have just kept paying your mortgage payment regularly, that would be the best way to do it. But another way that you can, and in a way that, uh, I just saw recently was similar, very similar to what we've talked about in the past about eliminating your debt.

Speaker 1:
The examples that I used this, this person had set up years ago, a life insurance policy that's overfunded. And they had put money into this plan for numerous years. Let's just say it's been over 20 years, been putting money into this plan, maybe even 30 years. And they've built up a significant amount of cash, so much so that they now have enough cash in there that they can pay off their mortgage. And this is a plan that I've used personally, my wife and I, to pay off our home and other debts. Uh, we've helped other federal employees mitigate their debts using plans like this, but what they're going to do is utilize the cash within their plan, and they're going to take a loan from that cash and pay off their mortgage. Now you're saying, um, why are you taking a loan? Or why are you using a loan to pay off another loan? That doesn't make any sense. You're talking about eliminating debt. Why would I go into debt by taking out a loan to pay off a loan? Well, not all loans are the same, and not two loans are exactly alike. There's a difference between the interest that you're paying in your mortgage, compared to the simple interest that you're going to be paying from the loan on this policy. In this example. So they're taking a loan out.

Speaker 1:
They're eliminating the mortgage, paying that off completely with the loan. And let's say it's now 300,000. That's the principal balance on the mortgage. And they're going to now pay simple interest on this loan that they're taking out from their policy. And maybe that simple interest rate, typically around 5%. Okay. 5%. And that interest gets charged on an annual basis, and they're now going to redirect all that money that was going towards their mortgage, if not, if not a little bit more, because they're going to put their whole payment in the payment that even with the escrow and the, um, the amount that was going towards insurance and taxes. They're going to put that back into their policy. They're redirecting that entire mortgage payment. So I was just talking about the 1700 that was going towards principal and interest, but it was more like 3000 a month that was going towards escrow plus taxes, you know, for insurance and taxes. So now we're going and we're putting in 3000. So it's 36,000 going back to this policy. And we're going to be chipping away even more and a lot faster. This policy now how does how does simple interest work on this plan if you're sticking with me here. So we just went from a payment of 1700 where $750 of that was going towards interest to now we've got a $300,000, a New balance, 300,000 simple interest on that is 5%. So they're adding 15,000 to the balance.

Speaker 1:
So now the balance is 315,000. And we're redirecting is 36,000 a year to go towards it. So not only are we going to knock down the interest to it, we're going to continue to chip away at the the principle of this, and it's not going to be this amortized kind of payment like a mortgage is, and that it's front loaded with interest where you're paying, you know, 44%, ten years in is going towards interest, you're going to be able to now mitigate and tackle and, uh, utilize your debt a little bit better. Now, here's the cool thing about this kind of loan, right? It's not required that you pay it back. Number one, uh, it's a loan. So your, your cash value there 300,000 within the policy. And they've got more in there. It's going to continue to grow with interest. So they're earning interest on the loan. Technically they're paying simple interest on the loan and not this compounding every month or high interest. It's simple. And they can mitigate this a little bit better. What if they miss a payment. What if they decide they're going to hold on to the 3000 a month, not put it back into the plan, not pay it. Their house isn't going to get foreclosed on. They are not required to pay this. The house is actually paid off and is not contingent upon this loan anymore. They have more flexibility in it.

Speaker 1:
So hopefully you're following still. And I know I'm going off the cuff a little bit, and I just want to give you this scenario and kind of discuss it and talk about it. But I use an extreme example of a mortgage and somebody that I was seeing utilizing a plan that we've talked about on this show before to help people get out of debt and get out of debt in a fraction of the time and at the same time build an asset, an asset that not only comes with the tax free death benefit, but also earns interest on a tax free basis, and it gives you more flexibility and control with any debts you might have. I'm seeing somebody utilize that exact thing in their financial plan with their family, and they are so thankful and grateful that it works the way it does. And I said, you have to thank the person that told you to set this plan up when they first did, because you've got 30 years of more of building funds or building this asset that you're now utilizing to control your debt. And they are so grateful that they took that step. They took that leap. And the person that they talked to, it wasn't me 30 years ago or 30 plus years ago. It was a friend of a friend, somebody that that told them about this opportunity and they took advantage of it and they stuck with it.

Speaker 1:
And now they've got this, again, asset that they can utilize to control their debt. They've got this asset that they can utilize in a variety of different ways. And it's so flexible and it's so easy to use. And we've been talking about it on this show. So I wanted to share this, this real life example. Again, I've used it personally. My wife and I had to pay down debt, also pay off our house. Um, it's something that I'm a believer in. It's not for everybody, I will say that. But if you're somebody that does have debt or multiple debts, we've talked about this on the show so many times and shared examples. I highly encourage you to at least look into it. You might still brush it off and say, this is not for me. This is not for my family. This is not what I want to do. Fine. But what if you never looked into it? You didn't know that it was an option? There have been so many conversations that I've had with federal employees over the years where they're thinking, yeah, this isn't for me. Oh, we're talking about life insurance. And so that's a four letter word. That's so r, I don't think I don't believe in that kind of stuff. But then we map it out and they realize that their misconception, their preexisting beliefs about life insurance and how it can be utilized were wrong, were incorrect, and they were told something that wasn't true, or they believed something because they heard it on TV, or they saw a negative review online.

Speaker 1:
And a lot of times it comes down to, you know, human error. The design on the plan was incorrect and, and how the people utilized it. Or it was it was misrepresented or mis sold, but when sold properly and when designed properly, these plans can work tremendously. That's why high net worth individuals that you. That you read about on on TV. Uh, they they won't go out and tell you, but they have cash value life insurance policies. They have these things set up, uh, on the back end because they know how to utilize, uh, they know how to take advantage of, of the rules and how to take advantage of the, the tax implications for a properly designed life insurance plan. It is an awesome thing to do. So don't take my word for it. Schedule some time, talk to an expert in this. If it's not me personally, it's one of our reps issue. I go to our website. You can go to federal retirement Show.com fill out the form and give me the good, the bad, the ugly too. I mean, I want to hear, you know, the good, the bad, the ugly on this. I told you, it's not. It's not for everybody. So I don't want to, uh, have a bunch of negative, hey, life insurance or this, and that would just, you know, there's better ways.

Speaker 1:
I said it's not for everybody, but in the right situations, it can be such a game changer for you, for your family, for your future. Um, and I can share with you example after example, this was just one that I recently came across, which I thought was awesome. And they're utilizing their plan that they set up years ago to get out of this mortgage, uh, save a ton of money on interest over time, take control of that debt and have more flexibility, more options. And, you know, like I said, the big thing is just saving on the interest over time and take in more control. So awesome stuff. If you're in a similar situation. I talked to federal employees, retirees that have all these different debts across the board and they have no plan. They have no where to go. If you need to discuss options, again, reach out to us. It's our website, Federal Retirement Show.com. Fill out the form and we'll do not only a full benefits and retirement analysis of your current situation when it comes to your federal employment, but we can look outside of that and take an inventory of all the debts that you have and put together a proper plan to help you pay those off over time. There's no get rich quick scheme here or magic sauce. It does take a dedication and diligence, but you need to have a plan to get yourself out of debt.

Speaker 1:
And who doesn't want to save money, save on interest and put more money back in their pocket? I think everybody's going to raise their hand. I'm raising mine too. So go to our website again. Federal retirement Show.com fill out the form. One of our experts. If it's not me personally, we'll be reaching out to get you that full benefits review, but also do a debt analysis and see how we can help you out and help you get out of debt in a fraction of the time. I really appreciate you taking the time to view our content. As I mentioned earlier, if you like this episode, go view all of our others. We have over 170 of them and I have a huge favor to ask. Share this show with a friend. There are other federal employees that you work with that need to hear this information. If they're not already listening. Ask them the federal retirement show. They can listen to it on YouTube. Um, on Spotify, on Apple podcasts, go to our website and watch episodes. So I. Appreciate it and thank you in advance for sharing our channel with your colleagues. Well, again, I appreciate you taking the time to view our content view this episode. My name is Val Majewski with American Benefits Exchange, and I look forward to seeing you on a future session.

Speaker 2:
You check your account balance and realize you have no idea where your last paycheck actually went. Bills are piling up. That nagging anxiety kicks in and you wonder, how did I even get here? If that hits too close to home, you're far from alone. And April just happens to be the one month of the year the entire country stops to do something about it. I'm Jim here for the Retirement radio network powered by Amaryllis.

Speaker 1:
Financial literacy is so important because it's what you're going to base the rest of your life on resource wise.

Speaker 2:
John Ford of CNBC bringing up an obvious but important pointer about money and finances. April is National Financial Literacy Month. It started back in the early 2000 when Congress realized too many Americans were leaving school without the first clue about how to manage a paycheck, a credit card, or a financial future. Fast forward to 2026, and the problem hasn't gone away. In fact, nearly half of us adults still give themselves a C minus or worse on money knowledge. And as CNBC's Bertha Coombs tells us, one of the best investments you can give yourself learning how to manage your money.

Speaker 3:
You know, we all work very hard for our money, and we should learn how to make our money work for us. And I think if you invest in knowing how to manage your money, that it will pay off as you get older, it'll pay off in your life.

Speaker 2:
It's about knowing enough to stop making the same expensive mistakes and finally starting to make decisions that move your financial life forward. So here are five quick financial wins you can achieve this month. Review one monthly bill and see if you can cut, renegotiate, or cancel it. Follow that with pulling up your free credit report and spot any surprises. Next, set one small savings goal. Even 20 bucks a paycheck counts. Don't forget to learn just one new money concept, like how compound interest actually works for you instead of against you. And maybe the most powerful one. Sit down with your partner and or your kids and have one honest conversation about money. No judgment. Just a real talk. While Financial Literacy Month won't fix every financial bump in the road you may have, it can be the month you finally stop feeling helpless about money and start feeling in control. So pick one thing. Do it this week. Because the best time to get smarter with your money was 20 years ago. The second best time right now in April for the retirement radio network powered by Omairalive. I'm Jim.

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