Welcome to the Wealth Scribbles Series, helping you better understand and grow your confidence with the basics on a variety of important wealth topics.
In this post, we’ll take a closer look at the next competent of the Balance Sheet – Liabilities.
In general, Liabilities consist of financial debt owed by an individual, company or even government owes financially. For example, a mortgage is a liability as it finances the purchase of real estate.
Similar to Assets, Liabilities can be divided between Current and Non-Current Liabilities. The main difference is in the timeline of expected pay down of the debt.
Current Liabilities are likely to be paid off within the next twelve months. For example, for individuals, a credit card, such as Visa or MasterCard, would usually be listed as a Current Liability.
And, as one would logically suspect, a Non-Current Liability is a debt expected to be paid down in more than one year. A mortgage on a real estate property would be listed here, as it will take many years to pay down and remove from the Balance Sheet.
From a corporate balance sheet perspective, a Current Liability could be the company’s tax liability, which is expected to be paid off within the next 12 months. In terms of a Non-Current Liability, the company may list an issued bond with a maturity of more than one year. And yes, these are the same bonds that may be held in private investment portfolios.
When it comes to personal Liabilities, Pinnacle Sovereign Wealth devised a unique categorization system to help establish a proper and financially healthy use of debt. Contrary to popular belief, liabilities are an important component in the growth of company or personal wealth portfolios. Without them, it would be very difficult to finance assets, which are used to power wealth growth forward.
As such, it’s important to have a foundational understanding about Liabilities. When reviewing any Balance Sheet for a private individual, business venture or government entity, the Liabilities section gives a good sense of how one of the two available sources of financing are being utilized. Assets don’t buy themselves so it’s helpful to know how, if at all, debt is used to help carry the asset load. The Balance Sheet will demonstrate if the debt is deployed safely and efficiently in a manner not to become burdensome to the day-to-day and long-term viability of the venture or family.
From an investment perspective, an investor would be wise to determine what other debts exist before agreeing to lend more money, given potential risks of tacking on more debt for the company or government to service. Banks also look at how liabilities help by households before agreeing to extend any further credit.
An evaluation of liabilities can also help the lender or investor gauge the reasonability of the interest rate of the debt. Interest rate is the price the borrower pays the lender so if a lender deems a borrower to be a higher risk, it would only be sensible to ensure a sufficient interest rate is charged to offset potential risks of lending that company, government or person.
That’s it for this quick Scribbles post on Liabilities. Please connect with Pinnacle Sovereign Wealth if you’re looking for guidance in your own personal wealth matters by sending us a note through our Contact section. We’re here to help so don’t be shy.
Together to self-ownership and happiness so we can win at life,
Adrian