A liability is something you owe, either now or later. A liability takes away from your net worth.
Liabilities are usually classified as either short-term or long-term. Examples of short-term liabilities are:
- Credit card debt
- Utilities
- and any other debt that must be paid off in less than a year
Long-term debt is debt that is usually paid off in more than a year. These include items such as:
- Auto loans
- Student loans
- Home mortgage
- and any other large purchase
For the most part, the less debt you have, the better. However, there are times when debt is necessary. I don't know a whole lot of people who can pay cash for a home!
Next time I'll put this all together in a model net worth statement so that you can see how it all works together. Until next time, feel free to familiarize yourself with the other related posts:
Financial Planning Basics - The Net Worth Statement
Net Worth Statement - Part III
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