Know Your Assets and Liabilities
Liabilities – Something We Are More Familiar With?
In part 1 of this article series, we spoke about loss aversion and what really constitutes an asset. Now we are going to continue with liabilities.
The mortgage for paying off the home we live in is just one item. Unfortunately, many of us are more familiar with liabilities than assets.
There are many examples for liabilities. They include the expensive dress and the designer jeans which you bought on your credit card. Add the rates you owe for your house and unpaid taxes. Also car loans and student loans.
Liabilities are also everything else you buy on debt that does not generate income to your pocket. Expenses like fuel, cable, insurance and so on also go into the liabilities list.
Low-income households often have or very little or no funds left for generating assets. Higher-income households may also have a lot of items on their liability list on account of a more elaborate lifestyle. However, they make still make the wrong choices and increase their liabilities instead of taking advantage of having money left to generate assets.
Check Your Liabilities
So your liabilities exceed your assets and/or are increasing faster than your assets? Then you may be heading for trouble in the long term. In this case, it is time to start over with your financial life. Assess your situation without mercy and make a plan. If your liabilities greatly exceed your assets and you are just getting interested in investing, it may not be a good idea to start investing just yet.
Instead, make sure you begin to reduce your liabilities on the one hand and your debt on the other, starting with high-interest debt.
Get Into Shape by Cost-Cutting
Of course, in the medium to long term your plan should to start generating assets as soon as you are in better shape financially. There are many simple ways to reduce your liabilities to start generating income instead.
Apart from cutting obvious costs like your daily coffee-to-go instead of taking it along from home, not buying the watch, reducing excessive children’s scheduled extracurricular activities, not buying the newest mobile phone, renting a smaller place, cooking instead of eating out or ordering take-out, there is a wealth of websites such as this one explaining in detail how to reduce items on your liabilities list in order to get to the stage of adding assets to your asset list.
Make sure you tune in for the next article in our series on investing to find out more on increasing your assets.
Please note this PURA article is merely for the purpose of information and does not serve as investment advice or financial service. Trading and investing involve substantial risk of financial loss, including loss of principal and all trading and investing you pursue is at your own risk.