Lesson 3 - Statements and Budgets - Part 6

Liabilities

Liabilities are what we borrow from others, this might be in the form of a car loan, or student loans for higher education, or the use of a credit card. In any case these all need to be paid back at some point. We use debt so that we don’t have to use all of our Liquid Assets, or our Liquid Assets might not be enough to cover certain expenses such as a Car loan or student loans etc.

It is not uncommon for younger people to have more Liabilities than older people. Again we must compensate for the small income in the beginning of our career. I don’t think many would want to wait until there 50’s when they are earning near their peak income to start thinking about buying a house or having a family. In order for us to start younger in some cases we must compensate with Liabilities.

We have two categories of Liabilities, Current and Non-Current.

Current Liabilities are any debts that must be paid within one year. These can include unpaid bills, credit cards and cell phone bills. These are bills that are due every month or every period. Then there are installment loans, our house payment or car payment would be considered installment loans. Within one year we are not paying the car loan or the house loan off however, we do need a certain amount to make the payments for the current year. An electric bill or mobile phone bill are both examples of Current Liabilities for they are usually paid every month.

Non-Current Liabilities are all the other debts that we owe beyond one year. These loans might not require immediate payment, but must be paid at some point in the future.

If for example we have our 4 year car loan of $10,000. Our Current Liability is $2,500, this is how much we will have to pay back on the loan every month for one year. While the Non-Current Liability is the remaining balance of $7,500 because this amount is not due within one year.