What is a financial liability?

Five financial liabilities you don’t know you have

The word ‘liability’ has a strict accounting interpretation, though for the sake of this article let’s keep it simple and stick with the Oxford definition of a liability as “A person or thing that causes you a lot of problems.” The opposite of a liability is an asset, which Oxford defines as “A person or thing that is valuable or useful to somebody/something.”

The common understanding of a financial asset is something that we own such as cash, private property, investments (including KiwiSaver), and even household furnishings and collectibles. Financial liabilities are usually considered to be the debts a person or a business owes.

When it comes to personal finances, it pays to keep an open mind. With that in mind let’s see if you have any of these unconventional financial liabilities…

If you haven’t read it already, you might also be interested in the sister-piece to this article – five financial assets you don’t know you have.

1. Friends

Your friends might be a liability if you’re finding yourself ‘keeping up with the Joneses’, or in other words, you always strive to own the same expensive objects and do the same things as your friends or neighbours. This may be so you can have the same social standing as them.This can be one of the reasons for the financially lethal condition of lifestyle creep.

If your friends are a financial liability, maybe you’ll also be dragged to places you don’t need to be, or maybe friends will even tell you “you’re doing fine” at times when you’re clearly not.

Perhaps your friends are an asset most of the time, but when the weekend comes around, they turn into a liability?

To clarify: if your friend or friends ask for help, it doesn’t necessarily mean they’re a liability. Asking for help may indicate they’re mature enough to know their limitations and are humble enough to admit “I don’t know how to do this” – it may also show they’ll be there when you need them too!

2. Family

Families are a complex and personal area. At worst, family members can be unsupportive and drag you down financially. The following questions may help you determine if any parts of your family have become a liability:

• Are you and your spouse working towards the same financial goals? *
• Are you supporting family members you shouldn’t be, including adult children who live at home? (If so, here’s how to kick them out!)
• Do any of your family members try talking you out of your goals, or discourage you in any way?

* You and your spouse are different people so there will always be differences – otherwise, there’d be no point in having a spouse! – but you should be able to find agreement on your major life goals.

3. Your home

Ask anyone with a financial background whether your house is an asset or liability, and they will instantly tell you that your home is an asset, contributing to the total of your net worth. However, here at Milestone Direct we know this isn’t always the case. Give some thought to the following:

• One of the major reasons why individuals think that their home is an asset instead of a liability is because traditionally Kiwis have been able to make a profit from it when they sell due to appreciation and home equity. Unfortunately, this relies on two factors:
• To influence the value of the home, you must pump more money into it, and you cannot convert that equity into cash until you sell it. And/or
• It would be naive to believe that the growth in property prices across the past decade or two is going to continue at the same rate into the future.
• Your home creates liabilities beyond just the mortgage principal and interest. There is also a requirement to maintain it, repair it, renovate it, and pay rates on it. You also must take care of the utilities, landscape the property, and insure it.
• Especially when home values are climbing – some people can buy into the hysteria and take out home equity loans (borrow more against the property) to buy cars, holidays, TV’s, and more.
• Over the long-term many people also intend on moving from a city to the regions when they retire and rely on ‘unlocking’ equity from their home in the process. But after someone has lived their entire life in one area with nearby friends, family, clubs, recreational areas etc, when it comes time to retire a move to the (unfamiliar) regions is often reconsidered.

Should you avoid buying a home?

Not necessarily. There are still plenty of benefits to home ownership, and for most people the cornerstone of an enjoyable retirement is having a debt-free home. However, be wary of committing a huge percentage of your income to buying an "asset" that may turn out to be a liability.

4. Bad health

Bad health can cost you in many ways:

• Medical bills and related costs,
• Time off work,
• Missed opportunities,
• Less time doing the things you really enjoy – including spending some of you hard-earned funds!

Make your health a priority to ensure this area is an asset, not a liability.

5. Your attitude

Let’s use an example to illustrate this point:

Imagine you’re a recruiting officer who has two applicants to decide between:

1. The first has more than enough relevant experience and backs this up with a great CV including an impressive education.
2. The second candidate's skills and experience are not as advanced as the first candidate, and the education isn’t as robust.

Clearly the choice is a no-brainer, right? But… when it comes to the interviews:

• Candidate One is a minute late, then comes across as smug – even interrupting your questions and taking a couple of different moments for smartphone checks. Candidate One has no questions about the role.
• Candidate Two arrives early then comes across as positive, engaging and asks well-thought out questions.

As the recruiter, who would you choose now?

Back to you

Over the long term, the knowledge, skills, and attitude you have will make or break you. People with negative attitudes see the problems in all situations. They focus on the shortcomings of others, complain about their lot in life and point the finger at others. Their language is also negative and comes from a place of anger or victimhood.

It’s basically impossible to have a negative attitude and reap positive results over the long run. How many high-functioning, visionary, successful people have you seen or met who had bad or negative attitudes?

So, does your attitude make you an asset or liability?... The good news is that you are totally and fully in control of your attitude, so even if you can’t answer that question the way you like, you can change your attitude.

What next?

Especially if this article has been a bit downbeat for your liking, you might also be interested in the five financial assets you don’t know you have.

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