Dear Daughter,
Liabilities are the exact opposite of Assets. A Liability is something that you owe to a person or business.
Put a different way, Assets you OWN and Liabilities you OWE.
Liabilities and Debts are basically the same things and are often used interchangeably. The differences occur when you start examining them on the accounting side of things. However, for the purposes of this blog and most instances in the real world, they mean the same thing.
Your goal, from a financial perspective, is to have way more Assets than you do Liabilities.
Remember, when you owe someone something, you are paying them for the use of their money or stuff. You want people to pay you for the use of your money or stuff!
The best possible situation to be in is to owe nothing to anyone and own everything you have.
Sadly, many people find themselves owing more than they actually own.
When this happens to someone, they have no options and no control over their lives. Every bit of work they do to earn money goes to paying back money that they owe plus interest.
It is critical that you do not let this happen to yourself.
Liabilities (Debts) happen when someone wants or needs something that they do not have the money to obtain. So, in order to get that “thing” they must borrow from someone else.
The two most common types of Debt are called “secured” and “unsecured”.
Secured Debt is backed by an Asset. In other words, if you borrow money to buy a house or a car, that loan is secured or guaranteed by the house or the car. If you stop making your payments, the bank will take your house or your car back from you and sell it to get their money back.
Unsecured Debt is backed by you and your word that you will pay it back. It is also known as Consumer Debt. The most common type of Unsecured Debt is a credit card.
If you buy groceries using your credit card and stop making payments, the bank won’t come and take your groceries back. Instead, you will start getting very mean and very frequent phone calls demanding payment at all hours of the day and night.
You will no longer be able to borrow money because nobody lends to people that don’t pay back their debts. The bank may even take you to court and force you to pay the money back.
In either case, not paying back your debt has a huge impact on your life. You could end up with no place to live and no way to drive yourself to work. In many cases, you may not even be able to get a job because employers check your payment/credit history.
Employers don’t like to hire people that make bad life choices.
So yes, Debt is bad. Even if you pay back the money on time, you are still paying more than you should, because of interest.
Now, this is where I tell you that Debt is okay in only one situation. It is only okay, however, if you have the ability to pay back the loan quickly and have every intention of doing so.
Borrowing money to buy a house – also called taking out a Mortgage – can sometimes be a good decision. We’ll get into the reasons why in a future Memo, regarding ~ MORTGAGES. For now, just know that every other kind of Debt is not good. You only make other people rich when you borrow.
You, my dear, are too smart for that!!
Love, Dad
