Liabilities are simply the bills that you’re obligated to pay. Whether it’s a credit card bill or a mortgage payment, a liability is an amount of money you have to pay back eventually (with interest). If you don’t keep track of your liabilities, you may end up thinking that you have more money than you really do.

You should list the liabilities according to how soon you need to pay them. Credit card balances tend to be short-term obligations, while mortgages are long-term.

Don’t forget to include student loans and auto loans. Never avoid listing a liability because you’re embarrassed to see how much you really owe. Be honest with yourself doing so helps you improve your financial health. List the most current balance to see where you stand with your creditors.

Check how much interest you’re paying for carrying that debt. This information is an important reminder about how debt can be a wealth zapper. Credit card debt can have an interest rate of 18 percent or more, and to add insult to injury, it isn’t even tax deductible. Using a credit card to make even a small purchase costs you if you maintain a balance. Within a year, a $50 sweater at 18 percent costs $59 when you add in the potential interest you pay.

If you compare your liabilities and your personal assets, you may find opportunities to reduce the amount you pay for interest. Say, for example, that you pay 15 percent on a credit card balance of $4,000 but also have a personal asset of $5,000 in a bank savings account that’s earning 2 percent in interest. In that case, you may want to consider taking $4,000 out of the savings account to pay off the credit card balance. Doing so saves you $520; the $4,000 in the bank was earning only $80 (2 percent of $4,000), while you were paying $600 on the credit card balance (15 percent of $4,000). If you can’t pay off high-interest debt, at least look for ways to minimize the cost of carrying the debt.

The most obvious ways include the following:

- Replacing high-interest cards with low-interest cards. Many companies offer incentives to consumers, including signing up for cards with favorable rates that can be used to pay off high-interest cards.

- Replacing unsecured debt with secured debt. Credit cards and personal loans are unsecured (you haven’t put up any collateral or other asset to secure the debt); therefore, they have higher interest rates because this type of debt is considered riskier for the creditor. Sources of secured debt (such as home equity line accounts and brokerage accounts) provide you with a means to replace your high-interest debt with lowerinterest debt. You get lower interest rates with secured debt because it’s less risky for the creditor the debt is backed up by collateral (your home or your stocks).

The year 2004 was the eighth consecutive year that personal bankruptcies surpassed the million mark in the United States. Corporate bankruptcies were also at record levels. Make a diligent effort to control and reduce your debt, or the debt can become too burdensome. If you don’t, you may have to sell your stocks just to stay liquid. Remember, Murphy’s Law states that you will sell your stock at the worst possible moment! Don’t go there.

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