Liability

A liability is money you owe and will have to pay back, like a loan or a credit card balance. Even cash sitting in your hands is not really yours if it carries an obligation to return it.

That is why you should judge your finances by net worth rather than assets. Net worth is assets minus liabilities. A $300,000 house with $200,000 still owed on the mortgage means your actual share is $100,000. Paying down debt raises your net worth by exactly that amount.

The most practical way to rank debts is by interest rate. A 4% mortgage, if the payments fit your budget, buys you an asset. Credit card revolving balances at 15% to 20% compound faster than almost any investment can beat. When spare cash appears, paying the highest-rate debt first is effectively the most certain return available.

In accounting, liabilities are split into current ones due within a year and long-term ones due later. When looking at a company, the debt-to-equity ratio matters, but the real question is not how much debt exists. It is whether earnings comfortably cover the interest on it.