Personal finance is not all about savings and investments, but also about managing your expenses and keeping liabilities at the lowest possible level.
You can save more and invest, only when you can keep your expenses well within your income limit and refrain from borrowings.
In case you need to borrow, it should be for creating assets to ensure that your liabilities never exceed your assets.
“There are many ways in which people prefer to handle their personal finances. Assets and liabilities are the main elements that make up your personal finances. While assets are the valuables that you own like a car, home, etc. Liabilities are debts or obligations that are owed to other people or institutions,” said Anil Pinapala, CEO & Founder of Vivifi India Finance.
A person will have a positive net worth till the time he/she manages to keep his/her liabilities lower than his/her assets. Higher the assets and lower the liabilities, more will be the net worth.
“Assets must always be more than liabilities for an individual to retain a high net worth and be financially successful. Liability or debts can be short-term where it can be paid and cleared off in a short period of time within a few months or a year. Whereas long-term debts prevail for a longer period that exceeds more than a year. Track and manage them well to not get into financial troubles and achieve your financial goals,” said Pinapala.
“While liabilities may affect your personal finances if not managed in a disciplined manner, they are important for financial growth and to increase your assets when executed with a solid strategy in place,” he added.
Some of the examples for liabilities, as listed by Pinapala are:
- Auto loans: Prevails for a minimum of two years. Leads to ownership of a car, which is an asset.
- Student loans: Pays off tuition fees and helps secure a job in the long term. Helps in building assets.
- Secured personal loans: long term loans that offer lesser interests and include rigorous verification processes are liabilities that are available in the banks.
- Credit card balances: Debts incurred on purchases must be cleared off at the end of each month, else the interest rates may deplete your financial health
- Unsecured personal loans: These are short term loans that charge interest only for the amount used instead of the whole amount sanctioned. Apps like FlexSalary, FlexPay, and more, offer personal lines of credit that are for short-term, provide flexibility in repayment and disburse unsecured loans at reasonable prices to help people manage their finances well.
Pinapala lists some guidelines on how to manage liabilities efficiently:
Debts hinders a person from achieving their financial goals. One must have the discipline to make the repayments of loans on time to become debt-free quickly. Here are a few key things to remember while managing liability.
Identify your debts
Make a list of the debts you have and come up with a plan to become debt-free as early as you can.
Borrow an unsecured loan to pay off smaller loans
Apps like FlexPay and FlexSalary provide unsecured personal loans with reasonable interests. You can pay off your smaller loans to avoid paying extra interest rates.
Have a Garage Sale
Sell off items that are unused or unwanted that will bring in extra money adding to your debt repayment plan.
Keep a check on your spending habits. Leave your credit card at home. Cut your budget where you can increase cash for debt payments.