Lesson 2: Where Does Your Money Go?

MYM-2-03

What Do You Owe?

What you owe may include secured debt and unsecured debt. It will be helpful in coming lessons if these are listed separately.

Secured debt is "backed" by collateral. Collateral is the property a creditor has the right to seize if you do not pay the debt. The most common examples are a home and a car. Some household items such as furniture may have the same agreement. When a creditor has collateral for your loan, he or she has a "lien" on that specific property. Creditors who have security can repossess the collateral and sell it to get their money.

Unsecured debt refers to loans without collateral. It would be more difficult for a creditor to collect an unsecured debt so such loans may be harder to arrange and may carry a higher interest cost. Credit card balance is an example.

Another term to know: APR—Annual Percentage Rate of Interest. Interest is the money you pay to the lender for the privilege of using the money. The APR may be different from the stated interest rate because it is based on the full cost of the loan which includes fees and other charges. The APR tells you the true cost of the loan. You will find the APR on the disclosure statement you were given when you signed papers for the loan or on the disclosure statement with a credit card application.

Worksheet 2-A: Know What You Owe The chart is a tool for you to list all of your consumer debt. (Do not include mortgage payments. It deals with consumer debt only.) The completed worksheet is a clear summary of your obligations-installments, personal loans, and credit card debt. It is important to gather current credit information BEFORE you can begin developing a money management plan. You may complete the entire form now or just focus on monthly payment information. In Lesson 4 you will refer to the other details of debt on this form. The average family should not commit more than 20% of take-home pay to pay off consumer debts. If your family is larger, you may need to keep commitments even lower. Credit is discussed in more detail in Lesson 4.

After you know what you owe you will be ready for the next step-to review your cash flow.

Worksheet 2-B When is the rent/mortgage due? What day do you need to mail each utility payment? Do not forget pay day(s). Use a financial calendar for an overview of income and fixed expenses. Avoid late payments by allowing adequate time for mail delivery. This sample calendar page illustrates examples of entries on a typical financial calendar. Complete a general financial calendar for your household on Worksheet 2-B.