Liabilities are things that we owe, bound to be paid and usually settled over time. It reduces our money when we pay our debts until fully paid. Liabilities adds up to our expense in the form of fees&charges expenses.
Unlike other personal finance management methods, it is important that we also manage our liabilities specially if they incur high interest rate. Debts are commonly thought of as something negative, but it can be used to leverage opportunities with proper management.
Here are the 6 types of liabilities to keep track of:
Accounts Payables is owing money to other individuals, may it be relatives, friends, or P2P lenders. If you will need to borrow money, this is usually the first option since there is already trust between relatives and friends. Pro tip: make sure to pay your debts to relatives and friends to avoid burning that trust you’ve built. They lend you that money in times of need, so make sure you pay it on time.
Credit Cards Payables
Credit Cards Payables is a revolving credit wherein you can access a set amount of money within the credit limit. You can borrow money until you’ve borrowed the maximum. As soon as you repay the outstanding balance and interest, you can then borrow again up to the credit limit. Credit Cards usually have high interest rate so make sure to always clear the outstanding balance or at least keep it to minimum. We can pay additional payments on top of the minimum amount due to minimize the interest incurred. As long as you pay the outstanding balance within the statement period, it should not incur interest.
Bank Loans Payables
Bank Loans Payables is personal loan we borrowed from banks. It usually have a scheduled instalments. It is a one time sum of money that we borrow and then paid in equal payments over a period of time.
Mortgage is a type of loan that’s used to finance property. With a secured loan, the borrower promises collateral to the lender in the event that they stop making payments. In the case of a mortgage, the collateral is the home. It is also usually paid in scheduled instalments. This type of loan usually takes 15-30 years due to its huge principal amount. It comes with low interest rates since it is secured with collateral.
Business Credit is a loan you acquired to buy or expand your business with the anticipation for higher returns on the business. It can be a bank loan or peer loan that is used solely for a business. It’s a better practice to keep track of business credit for each sole proprietor business entity that you will own. Goal here is to have a higher monthly Profit Income than monthly instalments to increase your cash flow.
Rental Properties and Equipment Credits
Rental Properties and Equipment Credits is a loan you acquired to buy or properties and equipments you will use for leasing to gain Rental Income. Like mortgage, it is paid in fixed monthly instalments and with colateral tied to it. Goal here is to earn higher Rental Income than monthly instalments to increase your cash flow.