Classification of liabilities
Many people end up having the wrong liabilities, which leads to diminished chances of financial success. Not having a precise definition and categorization of what liabilities is has been the cause of this in some cases. People need to know liabilities well to avoid this.
Liabilities can be categorized into three different types; Productive, consumptive and destructive liabilities.
Classification of liabilities List
Productive Liabilities: Liabilities attached to an asset which provides an increase in positive cash flow are called productive liabilities. An example is a mortgage attached to the rental property.
Consumptive Liabilities: This type of Liability incurs expense and cost more than the increase in cash flow it brings. It may also contribute to productivity indirectly.
Destructive Liabilities: These are liabilities that reduce the ability to produce, destroy life value, and lead to negligible cash flow. An example is drugs.
Four golden rules you should abide by
Readers should always be conscious of this regulation after knowing about the different types of liabilities.
1. Keep yourself away from destructive liabilities always. They bring harm to both you and others, and the parties involved lose value rather than benefiting. This leads to financial failure if prolonged because if the value is lost, wealth also becomes lost.
2. Consumptive liabilities that exceeds the value of assets and put us in debts should never be incurred. To secure your finances, passive income has to be higher than expenses. Your financial fortitude will be jeopardized if expenses are unnecessarily increased by consumptive liabilities.
3. Never borrow to consume. Borrowing to consume is a bad action that adds unnecessary bad debt and financial pressure which is detrimental to financial health. Consumptive liabilities only let you feel good in the short run but bring disease in the long-term. It’s just like those junks food we consume.
4. Always focus on increasing liabilities that that come with a greater corresponding asset like productive liabilities. The only way to achieve higher passive income is through productive liabilities therefore always ensure passive income exceeds expenses.
The concepts of liability govern our lives and dictates a lot of our actions, so it’s necessary for everyone to understand it. It’s a good idea to understand what your liabilities are and the impact they cause in your life. Knowing this let you ae measures to protect yourself, your money and your property.
This article is short but full of knowledge. I believe readers can gain some financial education in the aspect of liabilities.