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Do you have any financial liabilities? Find out what this means, along with the different types of liabilities, with the MoneySense Glossary.
In the world of personal finance, a liability is a financial obligation or debt that a person or a company owes to another party. Liabilities could be money (such as unpaid bills or taxes, a loan, a mortgage, or credit card debt), goods, or services. They are not necessarily a problem unless you lack the income or assets to fulfill your obligations.
It is important to be aware of your liabilities to know your financial standing. For example, when you apply for a mortgage, you may need to provide recent bank and investment account statements so that the lender or broker can determine if you have the money for a down payment and the financial means to service the mortgage. The pre-approval process may examine other liabilities, such as credit card balances or car loans, too.
In the pension business, liabilities refer to the benefits a pension fund is obliged to pay plan members in the future. It is instructive to think of your personal retirement savings the same way: you must accumulate assets sufficient to cover your cost of living (over and above government transfers) after you stop working. If you don’t, you must reduce your liability by lowering your standard of living, for example by downsizing your home.
Example: “Steven had to add up his assets and liabilities in order to calculate his net worth for the end of the year. He and his wife want to buy a home.”
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