For very long, there has been no clear definition and categorization for liabilities. As a result, many people end up having the wrong liabilities, leading to diminished chances of financial success. To avoid this, it is imperative that people know liabilities well. Hence, to learn more about liabilities, please read on!
To start, readers ought to know that there are 3 types of liabilities. They can be categorized into productive, consumptive and destructive liabilities. Regarding this, productive liabilities are simply liabilities attached to an asset that provides an increase in positive cash flow in both the short run and long run. For example, a mortgage attached to rental property.
Consumptive liabilities are liabilities that only incur expense and cost more than the increase in cash flow it brings. However, it may contribute indirectly to productivity. For example, sofa, car, hand phone, etc. For destructive liabilities, they are simply liabilities that reduce the ability to produce, destroy life value and bring about negligible cash flow. One clear example would be drugs.
Now, after knowing the 3 classes of liabilities, it is important that readers also abide by the 4 golden rules. First, always keep yourself away from destructive liabilities because they bring harm not only to you but also others. This will create a lose-lose situation where the parties involved lose value instead of benefiting. With a loss in value, wealth also becomes lost and this can easily lead to financial failure if prolonged.
Second, consumption should be chosen wisely. Here, it is important that we never incur consumptive liabilities that exceed the value of assets and put us in debt. This is because to be financially secure, passive income has to be higher than expenses. If expenses are unnecessarily increased by consumptive liabilities, wouldn’t that jeopardize your financial fortitude?
Third, we should never ever borrow to consume. This is because such actions add unnecessary bad debt and financial pressures which can be very detrimental to financial health. Like junk food, consumptive liabilities let you feel good in the short run but bring you diseases in the long run. Since most people think logically, I would really love to ask if borrowing money to buy financial junk food can keep you healthy?
Lastly, we must always focus on increasing productive liabilities or liabilities that come with greater corresponding asset. This is an important step in anyone’s financial game plan because no matter what, to be financially secure and free, passive income must exceed expenses and the only way to achieve higher passive income is through productive liabilities.