Term, Principal and Interest......the Real Low Down!

We've been talking about debt....so we all now know that Debt is: (all together now!)

Debt is that which is owed.....

There are 3 key factors that we need to understand when going "into debt":

Principal: The original amount of a debt on which interest is calculated.

Interest: A fee paid on borrowed assets. It is the price paid for the use of borrowed money. An interest rate is the rate at which interest is paid by the borrower for the use of money they borrow from a lender. Interest rates are normally expressed as a percentage rate over a period of one year or APR.

Term: Time over which a loan or debt is paid. The term of the loan may be as little as a few months and as long as 30 years. In the case of credit cards there is no fixed term.....more on that when we talk about credit cards (in detail).

So in human terms.

The amount you borrow or put on a credit card is the principal.

For example:

• If you buy a new blouse using your credit card; and it costs $25, then the principal added to your credit card bill is $25.
• If you buy a new car. The car costs $10,000. Yo pay $1,000 cash and borrow $9,000. The principal for that car loan is $9,000.

Now there's interest.....interest is what the credit card, bank or finance company charges you for borrowing the money.  Remember when you buy a sweater with a credit card, you are essentially borrowing the money to buy that sweater.  Companies and banks don't let you borrow money because you are nice....they are in the business of making money so they charge a fee on what the lend you, that is how they make money...that fee is called interest.

So what's the low down on interest.....how do they calculate it, how do they determine what to charge as interest, how does it work.....(my next post will be on credit cards, charges, fees, etc).....for now...let's keep it simple.

Your bank credit card says all purchases are charged and APR (annual percentage rate) of let's say 12%.  What does this mean.....it means you pay 12% on your purchases on an annual basis...so let's do the math...

You buy a sweater on Jan 1st. for $100, using your credit card (12% APR), so let's say you haven't paid a dime on that bill by Dec. 31st you would owe the credit card company $112 right?  Well, that is the simple interest way of calculating interest.  You would also think that if you paid off that sweater little by little you would owe have paid the company less than $12, right?  Let's do the math....

Normally, what credit card companies do, is that they calculate the APR on monthly balances, and they will calculate the interest on the total balance due, not just the principal outstanding....

Check it out:

What happened?  Why is the interest total after a year $12.68 instead of $12.00? On a monthly basis, the interest calculation is based on monthly balance, so the interest rate divided by 12 (12 months) then calculated on the total balance principal outstanding plus interest on a monthly basis.  This is usually referred to as monthly compounding.  Can you imagine what or how much interest would be charged if this was compounded daily?  Let's see:

Yikes, $0.75....this is using a daily compound rate.  

So I know what you are saying, what gives, who cares, it is only 68 cents or 75 cents who cares?....well think about it, this is on $100 with a $12% APR, most credit cards charge around 20% APR, and most people purchase more than $100....so yes it does add up, and creeps up on you before you know it.

Secured vs Unsecured Debt? Huh?

Secured vs. Unsecured....what does this mean.....

again from wikipedia:

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower, for example, foreclosure of a home. From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property and instead the creditor may satisfy the debt against the borrower rather than just the borrower's collateral.

So in human terms.....

To pledge some asset: this means that the loan is for something of value, for example a car or a house. That means that the loan will be based on the value of that something. That something is also used as "security" for the lender; or

Secured against the collateral: this means that the value of the loan is backed by the value of something, and that if the borrower doesn't pay (defaults) on the loan, the lender has the right to that "something", therefore recovering the money they lent with the value of that "something"

So here's an example:

You want to buy a car. The car you want costs $3500. You only have $200, so you have choices:

1. You can save up the additional $3300, or
2. You can borrow the $3300

So let's say you go to the dealership, and decide that you really want the car right now, and you work with the "finance guy" and the dealership offers you a loan for the $3300. That loan comes with certain obligations (and yes, I'll go through all of the definitions of the terms associated with a loan going forward on this series on debt).

The deal is that you will have to pay $330/month for the next 10 months (to keep it simple).

$330 X 10 = $3300

So you agree, shake hands, sign on the dotted line and you drive off in your new car.

Every month you will have to make payments if not, the dealership has the right to pick up your car and try to sell it. Until you pay the last penny owed to the dealership, they have a hand on the car.

So you are going along, and 5 months down the line, you lose your job, used your money for something else, or forgot to pay your $330 payment. The dealership has the right to come and get the car and try to sell it to recover the outstanding amount you owe them. So let's do the math.

After 5 months, you would have paid: $1650 ($330 X 5). This means that you still owe $1650 on the car loan.

The dealership can take the car and try to sell it to see if it recovers the $1650 that still hasn't been repaid.

So let's say they do come and pick it, and sell it; there are a few outcomes:

• They put it on the lot and are able to sell it for exactly $1650 - you think you are in the clear right? wrong! they could still come back to you and ask you to pay additional fees associated with the pick up and sale of the car (wrecker, parking fees, tax, etc)
• They put it on the lot and are able to sell it for $3000 - wow, now you really think you scored, you think they will give you the additional monies to $1650 they received ($1450). Though you may receive a little something, it isn't likely, because of the above mentioned fees and costs, but if
• They put it on the lot and sell it for only $1000, you are still on the hook for the additional $650. Though it will be tough for them to collect, (now this is the benefit of a secured loan), their security is the car, or it's value. They should not be able to satisfy the loan against the borrower but only against the asset. hmmmmmm????

So why would the dealership lend you money for a car? What makes it a deal for them? How can they estimate the value of the car down-the-road in case you don't make payments (default) on the loan? In my next post I'll walk you down the road of an actual loan for an asset. How the bank determines payments, interest rates, term of loan, etc. All of that is linked to your "creditworthiness" and the value of the asset.

"Creditworthiness" - for everyone the bar is set differently. We each set that mental bar using past experiences with that person, or past experiences with other people.

We all have friends who we would lend money to, and those who we wouldn't lend a book to much less money, right? Well, every time you make that distinction, you are basing it on the "creditworthiness" of your friend.

For example, if I let you borrow something in the past, and you returned it without me having to beg you to return it (and by something I mean anything: money, clothes, a book, etc). I also have probably observed what other friends have gone through when letting you borrow something. All of that forms an opinion on your trustworthiness or creditworthiness.

It doesn't mean that that friend is a bad person, it just means that if I want to keep them as a friend and not get upset and mad at them, I just avoid putting myself in the situation in the first place. I just don't lend them things, I prefer to "give" them things not "lend" them things.....

Banks and credit card companies look into your creditworthiness, however since they aren't your friends, they most likely will look at your credit report and your FICO score to determine your creditworthiness (I'll go through credit reports and FICO scores in a future post).

Back to loans......What does an unsecured debt mean?

An unsecured debt or loan is exactly what it sounds like.

It is a loan based only on the creditworthiness of the borrower. If the borrower doesn't pay (defaults) on the loan, the lender can "satisfy the debt against the borrower" (sue the borrower)....

Ok, let's humanize:

So an unsecured loan would be a credit card for example. When a bank or credit card company issues you a credit card. They determine your creditworthiness to see not only if they'll give you a credit card, but what your credit limit is and what your interest rate will be.

Why is a credit card unsecured? Well let's assume that you don't pay your credit card bill. Do you think the credit card company will come to your home and start looking for everything you bought on the credit card and try to take it and sell it? NO!!!! They could never do that, not only because imagine what a pain it would be for the credit card company or bank to come to your home and look through your home, but because most of the time the stuff we buy on credit cards no longer exists (food, a night out, tickets to the movies).

Since the debt is not secured, the only thing they can do (aside from harassing you on the phone - which they can't do if you tell them to stop by the way!) is sue you. Every state has different rules, but in some States, the credit card companies can sue you for the balance due on your card plus legal fees for suing you. If they win the lawsuit there States where the judge can issue a withholding order on wages, deposits into bank accounts, a lien on your house, etc.). So even though you think they can't do anything, they can and will.

By the way peeps.....

The loans from your mom and dad, yup, if you are calling them loans, they are unsecured and they could in fact sue you for it. Mom's and Dad's out there, if you are "lending" your children money, make sure that everyone knows it is a loan and not just "help" to never be repaid. Make sure you have an expected date of repayment and that everyone involved knows when that is, if you don't, and you expect to get paid, expect to be disappointed or upset.

Everyone's expectations are usually different and everyone's view of parental loans is different. Make sure everyone is on the same page.

There have been times in my life when I've needed money for different things. I would ask family members to lend me the money only when I had full intention on paying them back. If I didn't think I was going to pay it back, I would ask my family members for a gift of money or to "help me out" and would tell them straight out, that I didn't think I would be repaying them. However, if I borrowed the money, I always always always, paid it back (grant it my family never charged me interest and I never paid interest) but it was important to make sure that everyone was clear on what to expect.

I learned this from my Grandmother, one time when I asked to borrow money for a car payment, she looked at me and said, "I think I would rather give you the money. Right now you are in a hard sport and you will probably be better off not worrying about paying me back". When I looked at her a bit startled, and very grateful, she let me in on the difference between asking to "borrow" and asking for "help".

See you next post to talk about interest, principal, term of loans, and more debt related stuff....

Cheers!

Debt - Definitions, etc.....

As promised, let's go into detail about what debt means, what the terminology surrounding debt is and what it all really means.

Let's start with What is DEBT? and then we'll break it down.

I got this definition from Wikipedia

Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.
A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in most cases, plus interest.

So what does this mean in human terms?

Let's say that you have $100, and you really want to buy a $150 pair of shoes. You have a few options, you can:

• Save the additional money ($50) and then you can buy the $150 pair of shoes, or
• You can ask someone to borrow $50 dollars with a promise that you will pay them back in a few weeks when you have the additional $50, and you will also treat them to lunch for "helping you out"

So let's break down the definition above:

• asset: $150 pair of shoes
• future purchasing power: the $50 you will have in a few weeks that you don't have now
• creditor: the "someone" you are asking to borrow the $50 from
• debtor: well that would be you, the person who is borrowing the money
• interest: in the scenario above, let's just say that the "lunch for helping out" is interest, or "payment" for their trouble and trusting you to pay them back. They granted you the $50 with the expectation that they would be paid back.

So now that we have the basics, my next posts will get a little more sophisticated and explain more terms:

• secured vs. unsecured
• interest calculations
• principal
• term
• payment types
• etc

Read along....before you know it you will be an expert on debt, then we can move on to other stuff.

Own your debt!

Knowing your debt.......wow!

In the world of credit cards, debit cards, lines of credit, mortgages......it is important that we all own our debt. If we don't own it, we can't do anything with it, right?

This week I say the Dutches of York on Oprah, aside from everything she has going on, I wasn't surprised she was way over her head in debt; I was surprised she didn't know how much she was in debt for (way in the millions I assume, but nothing she could even swag at). I thought about this for a while.....how many of us don't know how much we are in debt for?

How can you eliminate or start getting rid of something when you don't know what exactly it is you are trying to get rid of? Imagine running a race and not knowing where the finish line is? Better yet, imagine if you didn't know where the finish line was; and the finish line kept on changing the longer you took to figure out where it was?

DEBT is exactly like a race. We begin getting in debt, and then we should be able to eliminate that debt, and have a plan on how to get there.

Debt includes anything and everything that you are making payments on. It all counts: student loans, car payment, mortgage, the awesome red sweater you bought on super sale on your credit card, even the money you borrowed from your mom (if you borrowed it, it is debt - not just something between you and your mom).

I can't tell you all how important it is for you to know what your own debt is, but if you are married or have a partner, know what they're debt amounts to, know what your household's debt amounts to. I have had so many friends go through divorce/separation, and they are surprised when they have to assume 1/2 of their ex's debt. For many of us women it is easy to let our husbands handle all the finances, the mortgage, etc.; but then the unthinkable happens, divorce, separation, death....and then go into shock when they find out what the outstanding debt amounts to.

In the next few days I want to take some time and define all the terms associated with debt. We all sort of know, but don't really know. I want to make sure everyone understands and knows not only how much they are in debt for, but also what all the terms mean: interest, principal, compounding, amortization....(oh my!)

So people...add it up, write it down. Own your debt.

Anxiety.....Security......

I've discovered that men and women are different and react differently to money matters.

Traditionally, women need security (sometimes even a false sense of security) to thrive. Why is that? Security could mean different things for different people. In general, I think that security comes with a sense of "normalcy" or steadiness. The idea of counting on something as a constant, non changing thing. A steady paycheck, a steady schedule, a steady partner.

For me, steady income is security. It's not even the amount, whether it's $500 or $10,000 a month, somehow knowing that I can expect a certain amount come rain or shine gives me that sense of security, ability to count on something and plan around it. Even though I have been through enough lay-off's to know nothing is steady or forever.

In general I am pretty easy going, I have a good head on my shoulders, I know what is what....I know what our monthly expenses are I know what our income streams look like, and I have the discipline to stick to a plan or budget. I know that I have rainy day fund that will keep me afloat not only for the next 12 months but probably the next 18 months at my current lifestyle...SO WHY AM I SO FREAKING ANXIOUS ABOUT IT?

Anxiety is slowly creeping up on me. Maybe not slowly creeping up but is part of my internal being. As I mentioned in my earlier post, I am searching for a new position, but am debating staying self-employed.

I can tell that my anxiety is escalating because I am noticing that it is harder for me to fall asleep (I can't seem to turn my brain off, It just keeps running through "what if" scenarios), I get annoyed more easily, I tend to get the munchies or feel like reaching for a glass of wine or beer......so why do I go through all of these changes while my spouse continues his merry way.....why can't my logical intellect take over?

Here's a little research.....but my personal opinion is that women like to feel secure, they, whether it is genetically predisposed or socially imposed, feel responsible for the well being of the household, whether your house is an adult only home (like mine) or you have young children, somehow as a woman we make it our responsibility to be in charge and make sure everyone in the house is ok. In general also whether genetically predisposed or socially imposed men seem to be ok with changes and ups and downs, as long as they have a spouse/partner...I think they know that we as women will worry and make sure everything is ok.

Instead of fighting this, I think we can use the anxiety to push us further in our quest for success and our quest for security. If you are self employed like me, it is a driving force in getting new prospects and adding to the income stream. If I can focus my anxiety and convert it into energy and as incentive to grow and gain that security great; but it doesn't always work that way, we'll let the anxiety get the better of us. We have to keep it in check and keep in mind that no matter what there is always tomorrow. As long as you are prepared (and I mean prepared: Rainy day fund, budget, discipline) you should be ok.

How do I deal with it:
*Well, sometimes I do reach for the glass of wine - I have to make sure that this doesn't become a "go-to" solution for many reasons: I don't want to lose control of what I'm doing; Drinking is EXPENSIVE; Alcohol is not but empty calories and when you are looking for a job or are networking your appearance DOES count {don't get me wrong, I am not thin, I rather pleasantly plump. but still you don't want to be puffy and hungover when you talk to people}
*I work out, seriously, I may not lose weight or be in super shape, but getting through a tough workout, heavy lifting or spin class, usually let's lose some of the extra energy and it also pumps me up, if I can just get through the next 5 minutes of spin, I can get through anything (is my mantra during class...ha!)
*Now don't laugh, but guided meditation works....I plug in my ear-buds, close my eyes and listen, it helps when someone is guiding me through breathing and relaxing, it helps me not focus on all of the "what-if" craziness....

Bue most of all, I go through and remind myself that it's all going to be ok, that I am prepared for all of my crazy what-if scenarios, including the what-if the sky falls.....the best thing to counter anxiety is preparation and knowledge.

I'll keep you guys updated on my anxiety levels, but so far, my tactics are working, and my husband is unaware, so life as usual.

Unemployed Again......

Off and on through out my professional career I have been unemployed. I thought that I would be ok with whatever came my way. But somehow this time it's a little different, for the first time it is hitting me on a more emotional level, rather than on a financial (Oh! crap, I don't have a salary) level.

I have been busy trying to keep busy and trying to keep mental sanity. I also took some time to look at myself and try to figure out what I want to do next. I have been looking for a new "permanent position" but am also trying to figure out if I continue on my own.

So I guess I should do so "pro's and con's"...here goes....

"Permanent Position" or going to work for someone else -
CONS:
* hmm, is there anything or any job out there that is permanent, you know like back in the olden days....work with one company until you retire or die? I don't think that exists anymore
* the older and more senior in an organization I get, the more difficult it is to find a new job, or change jobs.
* I am venturing into an industry where I am not an expert, I have functional background and can do the mechanics of the job/position, but I get looked over for those with experience in the industry.
PROS:
* a steady income and benefits for as long as the job existed
* being on a schedule, not having to think about my schedule, it would be all mapped out for me...in at 8 out at 6.
* on a personal psychic level, this would give me "security". Though I know nothing is forever, the knowing I'll get paid on the 1st and 15th is security and lowers my anxiety levels....(II'll post on anxiety and security on a separate post)

Self Employed - CENAK Consulting LP
CONS:
* There is no steady stream of income, income is on a project basis, this means we have to have the discipline to budget and to have a "rainy day fund" (more on rainy day fund to follow).
* My anxiety levels are heightened, I don't have the security of income, and though we are well prepared for lows in income, logically I can think about life and monthly income/expenses and can totally get through it, but psychologically, my brain is playing head games with me....I get thoughts of not making it, what if scenarios fly through by brain as if the sky were falling....(why is it that my husband can deal with this and sleep like a baby, not have anxiety issues? He and I are partners in CENAK Consulting LP)
* Searching for projects clients, selling yourself and your services is hard, finding companies in need for services, especially in a down economy can get tricky.
PROS:
* the flexibility in schedule is awesome, I own my time and I get out what I put in. I am my own boss, and work on projects I really enjoy.
* Getting to work with my husband, he is my best friend, and though it gets tricky at times, and we get sick of each other, we totally respect each other's opinion; we know our strengths and weaknesses and build on those to create more business.

So all in all I am still confused and not knowing what/where I'll go next. In the meantime I'll continue project work and apply for jobs that I think will make me happy and would be a good trade-off for being self employed. I'll keep you all posted on what happens and what goes on.....but in the meantime, I'll blog about Finance and Money Matters for "REAL"....for all but for women in particular. CHEERS