Understanding Liabilities
Liabilities are simpler to understand than assets.
It is the state of being responsible for something. In finance, it’s usually money.
Any borrowing in any form from anyone is a liability if you have the obligation of returning the object borrowed.
Liabilities can divided into the following -
a. Short-term vs. Long-term
Payment of monthly rent is a good example of a short-term liability. Payment of your housing loan is an example of a long-term liability.
b. Interest Bearing vs. Non-interest Bearing
Your monthly rent usually is an non-interest bearing liability. Any kind of loan from a financial institution is usually an interest bearing liability.
c. Assets Are Liabilities Too
Like we learnt yesterday, if an asset is not able to provide inflation beating returns to you, it becomes a liability. Further, all assets like electronic gadgets, personal cars, etc require periodic maintenance and become liabilities as you have to make provisions to bear the costs.
Few common examples of liabilities -
Car loan
Housing loan
Credit card debt
Personal loan
Overdraft facility
Fixed costs like rent, electricity bills, grocery bill etc.
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