Monday, 29 February 2016

BS - Liabilities

I shall now cover the other component of your Balance Sheet (BS) - Liabilities. This refers to the various types of debt you can incur - mortgage loan, car loan, student loan, credit card debt etc. The main expense that you incur from having such debt is interest expense. My opinion is that this is the singular and most destructive weapon to wealth creation I have ever seen.

Have you ever heard of the Snowball Effect? It's a term used widely on how to build an investment portfolio. This post by Dividend Mantra - Building A Snowball -  describes the analogy well and it really shows the positive power of compounding.

Now, imagine if you apply the same concept to debt. This time round, you get to see the negative power of compounding. What's going to make things worse is that certain types of debt can compound quicker than an investment portfolio. Which is why one of the first steps to Financial Independence is to always reduce the level of debt that you have i.e. decrease the amount of liabilities that you have.

What's interesting is that the type of debt causing the problem can be very different between individuals. In the end, it comes down to the personal decisions that you make and the environment you live in. For example, I read the posts by US Personal Finance bloggers regularly and you can see a recurring theme for some of them - student loans. This has grown to be such a significant issue in US and the impact on young adults has been immense. However, this is less of an issue in Singapore because the education costs are more manageable. Conversely, a car loan is often a big problem here in Singapore because cars are so expensive, whereas this is less of a problem in US. The important thing is to identify the main type of debt that is blocking your journey to Financial Independence.

For us, the credit card debt and mortgage loan are our biggest problems. Although we pay off our credit card bills in full every month and the monthly mortgage loan repayment is manageable, they continue to be the main areas of concern when it comes to our BS - Liabilities. You see, as a working couple, it's much easier to spend than to save since you find a way to convince yourself that you deserve nice things for working hard. Think overseas trips, restaurant dinners, cafe brunches etc. Yes, I agree that it also largely depends on your habits and hobbies but you are almost always going to find yourself in a position to spend than to save. It's no wonder that credit card debt continues to spiral out of control in most developed countries. That being said, how we manage our liabilities is still a work in progress and I will write more about this in the future.

Interestingly, I got asked this question by my wife about the blog over the weekend and I found myself thinking more about it than I expected.

Why am I doing it?

I guess it's a general question on why I started this personal finance & investment blog, why I post our actual investment portfolio figures, why I spend the time writing about all these topics etc. Inevitably, every blogger gets asked this question and one could write an entire post about the personal motivation behind the blog. For me, the simple reason is that I want to see if we can actually reach Financial Independence. I want to know what it feels like - the day we walk in to work and know that we can walk out at any time. The feeling of being accountable only to ourselves to figure out what we want to do with the rest of our lives. I want to document this process because it will become our library of experiences to be shared and I hope that it will benefit other people on the same journey as well.

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