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What are liabilities? | Financial liabilities, debts, and your net worth | Net Worth 101 - YouTube
Channel: Happy Net Worth
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We’re diving deeper into net worth
and today we are going to focus on
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liabilities – what the heck are they
and how do they affect your net worth?
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If you haven’t already watched my
intro video explaining net worth,
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I highly recommend you go back and start
there, but if you just need a quick reminder,
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then net worth equals your assets minus your
liabilities. It’s actually a really simple
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subtraction problem – but only if you understand
the definition of assets and liabilities.
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I think “liabilities” is actually
a really intimidating word.
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It takes me right back to the college
accounting class I didn’t do so well in,
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but at the end of the day it just means
“debt.” Your liabilities are your debts, or
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any money you owe someone else. Simple,
right? Liabilities are a lot easier to
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calculate than assets, so hopefully we can
clear everything up in the next few minutes.
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Let’s break common liabilities down
into a few different categories...
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…starting with Loans: These are probably the most
common type of debt. The first thing you want to
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look at is your list of current assets because
some of them may have loans associated with them.
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For me, this is my house and my car. I have a
loan for both. But you might have loans for other
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pieces of property, like a boat or motorcycle.
These types of loans are often called “secured
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loans” because the bank who lent you the money can
take your house or car if you don’t pay the loan.
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You may also have other loans like personal
loans. Those can be used to consolidate debt
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or help get you through a tough time. These loans
aren’t associated with property and, therefore,
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aren’t secured. As a result, they
often have higher interest rates.
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Then there are also student
loans. These are really common,
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so if these apply to you, make
sure you have them on your list.
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Finally, you might also have unofficial “loans,”
like money you borrowed from a family member that
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you’d like to pay them back. If this is the case,
it should be included in your liability list, but
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it’s not going to show up in your credit report,
which we’re going to talk about in a moment.
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The next big category is Credit Card Debt:
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Many people have this type of debt and it’s
often considered the worst type of debt due
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to the high interest rates associated with
most credit cards. Credit card debt is a
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little trickier than loans because the amount
you owe can vary greatly each month depending
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on whether you’re actively using the card or if
you’re paying more than the minimum each month.
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It’s also important to note how credit cards work.
Let’s say I use my card for most of my purchases,
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but I always have money to pay off my
balance every month. In this situation,
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I never pay the credit card company any
interest, but I still have a balance. So,
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when I go to calculate my net worth, I
want to include my credit card balance,
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because it essentially cancels out money I
have in my bank account. So if I have $5,000
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in my bank account, and a $1,000 balance on
my credit card, then $1,000 of the money in
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my bank is already set aside for my credit card
payment. I can’t just pretend the $1,000 balance
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isn’t there just because it’s not reflected on
my credit report or credit card statement yet.
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Finally, there’s Medical Debt:
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This debt occurs when people have large
medical expenses they can’t cover,
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and they either don’t pay their bills and they go
to collections, or they ask their hospital for a
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payment plan. Again, if this applies to you,
make sure you have it on your liability list.
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Regardless of what types of debt you have, one
way to find all of your debt information in
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one place is to pull your credit report. All
of your debt is associated with your social
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security number in the United States, so you can
simply go to annual credit report dot com and
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ask for a copy of your credit report. All
of your debts should be listed right there.
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This is one way to check you haven’t forgotten
any of your liabilities. It’s also good to double
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check there are no mistakes on your credit report
by looking at it every so often, so this strategy
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is a win-win. If something seems off, call the
credit bureau that provided the report right away.
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Please note, you can only get a free credit
report once per year from each of the three
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main credit bureaus, so I recommend pulling your
credit score every four months from one bureau
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or pulling your credit score
annually from all three to compare.
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Also, don’t forget to add any unofficial loans
you owe to friends or family or medical bills
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you’re paying off to what’s on your credit
report because those won’t be reflected there.
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When you write out your liabilities,
the most important thing to know
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for calculating your net worth is
your total balance on your debts,
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but I want to talk a little bit about
two other important numbers associated
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with your debt – minimum payments and interest
rates. Whenever I make my list of liabilities,
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I also write down these two things because they
greatly affect my decisions about my finances.
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Many of us have goals to pay off our debts
early, especially credit card debt. When we
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know the interest rates and minimum payments
on our debt, these numbers can help us decide
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how to tackle our debt. There are a few different
ways to tackle debt, but I’ll talk about those in
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another video. For now, know that recording that
information could be helpful to you later on.
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To summarize, liability is just a fancy word for
debt, and you just need a list of your assets
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and their values, and your liabilities and their
balances in order to calculate your net worth.
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Now go make your net worth happy!
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