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Liability
One of the best tools you can use to get a snapshot of your actual finances is a balance sheet. This tool helps you calculate your assets- things you own, even partially- and your liabilities- what you owe or are obligated to pay. Subtract your liabilities from your assets and you have your net worth.
Because of these equations we often see liabilities as a negative. However, sometimes a liability works in the consumer’s favor, such as your mortgage. The interest you pay on that loan works to lessen your tax liability because it is a healthy deduction. And you are getting something for the money that is going out to this “liability”- a place to live and eventually complete ownership.
This is the key to healthy liabilities- you want to be receiving something for what you pay out. In other words, make every dollar you spend bring you a good or service in return. Money spent on non-deductable interest and loan fees is wasted money. This is the fat that needs to be cut from your cash flow diet. That means bringing your credit card balances to zero each and every month. Carrying debt that costs you money for no return is not sound financial work on your part. It certainly is tough to do but make it an objective for yourself and stick with it.
Next, make sure that debt you are taking on is affordable. Homeownership is a great tax saving vehicle but taking out a loan for more money than you can afford to pay every month negates all the benefits. If you’ve found a home to purchase and it is a place you will be living in for at least ten years, go with a 30 year fixed rate mortgage. Assuming you don’t refinance, you’ve essentially nailed your monthly housing liability to one amount for the next 30 years. Be cautious of Adjustable Rate Mortgages (ARMs), especially in a volatile lending market. Rates can change quite a bit in a few short years so if an ARM is the choice you make, do so with an eye towards planning for the rate to increase, not risking your investment on the possibility of rates decreasing.
Another way to mitigate liabilities is to plan for the unforeseen. That means insurance. Auto insurance should cover not just the cost of your vehicle but the cost of your attachable assets as well- such as your home. And if you are the main source of income for your household and you have kids you need to have life insurance. Twenty to thirty year term life insurance is best and the amount will be whatever you owe on the mortgage as well as living expenses and college costs for the kids. Usually something in the three to five hundred thousand dollar range works. I know this sounds scary but if you are in decent health it is relatively inexpensive and frankly the only responsible thing to do. Stick with the “Term Life” and avoid the investment/annuity insurance. Life insurance is not an investment, it is a safety net. You get better return for your money in a decent mutual fund.
If you have a more immediate need to reduce liabilities credit counseling is great place to start if the whole thing is intimidating. A credit counselor can help you consolidate debt and sometimes will even negotiate on your behalf with your existing creditors. Just shop around and find a reputable firm to work with.
Topics: Debt Consolidation |
