BrightDime Basics: Liabilities
Last week we started a new Bright Ideas series called BrightDime Basics, where we’ll cover everyday concepts we need to understand to have a simpler, healthier financial life. We started with assets and now we’re talking about the other side of the equation; liabilities.
A liability is anything you owe. All your debts and obligations are liabilities. This includes the balance on your credit cards, the amount you owe on a car or student loans, a mortgage, even an IOU for the $10 you borrowed from a friend. Some liabilities are short term that you pay off within a few months, like a $100 credit card balance. Others may be long term and paid off over years and years, like a mortgage.
Here’s a quick example. If you pay cash for a new TV, you own it outright. You’ve exchanged one asset (the cash) for another (the TV). But if you buy it on an installment plan, or with a credit card – now you have a liability. You owe the cost of the TV (maybe plus interest, which increases what you owe) to the store or the credit card company. You’ve deferred paying it until later, so now you have a liability to represent those future payments you’ll need to make. As you pay it off the liability will shrink from the total cost of the TV down to where you don’t owe anything anymore and the liability is equal to zero.
The most important thing to remember:
Asset = own.
Liability = owe.
Is there a money issue you’ve always wanted to know about but been afraid to ask? Let us know and we’ll include it in a future Bright Idea.