Finance Definitions: What is a Liability?

Finance Definitions: What is a Liability?

Assets and liabilities are something we deal with every day. This cupcake has several assets:

  • Frosting
  • Dreaminess
  • The capacity to make me complete

Sadly it also has liabilities:

  • Guilt
  • Regret
  • The capacity to make me obese

We instinctively know what assets and liabilities are, but defining them precisely can help us make better financial decisions. We've looked at assets already, so let's take a look at liabilities.

What is a Financial Liability?

A liability is a financial term for an obligation to pay something in the future, which typically takes the all-too-familiar form of debt. Anything that you are required to repay at some point becomes a financial liability, including these examples:

  • Loans (Car,Home,Credit Cards,Personal)
  • Outstanding payments for services
  • Bills
  • Taxes
  • Court settlements

Basically anything you know you're going to have to pay off one day becomes a liability.

When Will Liabilities Affect Me?

You will most often hear “liability” used when you are applying for a loan. Your current debts will be paraded in front of you on your credit report, but your loan officer may very well ask, “Do you have any other liabilities?”

It is important to inform your loan officer of any recent credit purchases that may not be on your credit report and any family loans that would not have been reported to a credit agency. While this might seem like collaborating with the enemy, it's really helping your lender to keep you safe. They will look at all of your liabilities to determine how much house, car, etc. you can afford, so if you are up front about any outstanding loans, you can keep your liabilities from becoming overwhelming.

How do I Keep Track of My Liabilities?

Mortgages, car loans, taxes, insurance, credit cards, school loans, unpaid utility bills…with so many liabilities hanging over a typical consumer’s head, how can you track all of your bills and ensure timely payment? Most people have some concoction of calenders, lists, sticky notes and what ever else helps them make their payments each month. You may want to consider more high-tech options to track payments, balance checkbooks, and remind yourself of due dates.

Many personal finance software systems, such as Quicken, Moneydance, and offer easy-to-use financial tools that assist in tracking liabilities. Personally, I love Moneydance; it allows me to put all of my recurring payments on a calendar and details the amount of a typical bill for each liability. It will also remind me if I didn’t make my payment to a particular company. We'll look more closely at these options in an upcoming post.

While the term “liability” sounds ominous, they're generally just your familiar foe -- debt. Taming your liabilities and making sure they're manageable is probably the most difficult step in financial freedom for most people. Tracking your own personal liabilities can become intense, though, so using tools may assist you in fighting financial liability monsters.

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