Debt Is Easy to Understand. It's Liabilities that Confuse Most People.

Put simply, you're in debt when you have more liabilities than assets.  Think of a liability as something that incurs an expense. 

One way to think about debt is in terms of production and consumption.  If you consistently produce more than you consume, then you probably don't need to be concerned with the liabilities you take on.

But, in general, if you consume more than you produce – you need to be watchful, and limit your liabilities.

Three Types of Liabilities

Not all liabilities are the same, though. Productive liabilities – like rental properties – are assets. The more assets you have, the more cash flow can produce.  And cash flow is a better measurement of monetary wealth than net worth, which is a measurement of accumulated, stagnant money.

Most of us have been taught to stay out of debt and avoid liabilities at all costs.  But it often takes productive liabilities to gain access to assets that can increase cash flow and create real wealth.

Consumptive liabilities – like cars and boats – on the other hand, are those that produce an expense, but no income.  While most of us need a car to increase our productivity, a good rule of thumb is to never borrow money to purchase things that don't directly increase cash flow.

Then there are destructive liabilities, like drugs and gambling.  These do nothing but detract from life, and should be avoided at all costs. 

How to Manage Your Liabilities:

• Never incur destructive liabilities. 
• Choose your consumption wisely.   Never incur consumptive liabilities that exceed your assets and therefore put you into debt.
• Never borrow to consume.
• Focus on increasing productive liabilities, or the liabilities that come with a greater corresponding asset.

This difference in the types of liabilities is key.  While you should obviously be careful to limit consumptive liabilities, and avoid destructive ones altogether, productive liabilities have utility.  They're key in producing.  Instead of trying to avoid all expenses, choose to spend to gain assets that will more than offset your expense.  

What kind of debt do you hold?  What types of liabilities do you need to get rid of, and what types of productive liabilities might actually accelerate your cash flow?

One of the clearest snapshots of actionable insight into your finances you'll ever get comes from answering 10 Questions that's taken me half a lifetime to assemble, articulate, and interrelate.  It's a mandatory part of all my coaching programs, and I'm making it free to readers of this site. 

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