Definition

A liability is a financial obligation or debt that a person or organization is responsible for repaying. It includes things like loans, mortgages, credit card balances, and unpaid bills. In simple terms, a liability is what you owe to someone else.

Analogy

Think of liabilities like a backpack you carry on a hike. Each loan, bill, or debt is a rock you put in the backpack. The more liabilities you have, the heavier your load becomes, potentially slowing you down from reaching your financial goals.

FinTip: Use debt wisely

Not all liabilities are “bad.” Strategic debt, like a mortgage or business loan, can help you build assets that grow in value over time. A mortgage, for instance, is a liability that allows you to own a home—an asset that often grows in value over time. Similarly, a business loan can be a liability that helps generate higher income in the long run.

Little-Known Fact

The word "liability" comes from the Latin ligare, meaning "to bind." So, when you're dealing with liabilities, you're literally bound by a financial obligation—kind of like being tied down by a financial rope!

Action Step

Take a moment to calculate your total liabilities. Include all loans, credit card balances, and other debts. Compare this to your total assets (what you own). If liabilities outweigh assets, create a plan to start paying down high-interest debts first.

Bonus Tip: Set a goal to keep liabilities under 30% of your total income for better financial health.