Tuesday, September 29, 2009

How to reduce your liabilities to zero.

Before you can reduce your liabilities, you must know the difference between necessities and liabilities.

Necessities are the "MUST HAVE" items in your life. They are things that you cannot go without. Some examples of necessities are food, water, shelter and even mobile phone.

Liabilities are the "GOOD TO HAVE" items in your life. They are things just to "beautify" your life. One example is high tech gadget. These items will deplete in value after some time.

Sometimes it will depend on your usage to determine a certain item is a necessity or liability. One example is internet broadband subscription. I had explained in my other post why I had chosen the 3Mbps plan instead of higher plan. In short, it is a necessity for me to use the internet and 3Mbps plan is sufficient for me. Higher plan will cost more and it will build up my liability. In Chinese, there is a saying "if you do not have big head, you don't wear a big hat". It means buying what is necessary, do not over bought.

Here are some questions that you might want to ask yourself:
Q1) Do I need a big house for my family?
Having a big house is not wrong if you are intending to sub-let one or two free rooms to collect rental. It will become a asset. But if you not willing to sub-let, there is no need for big house as some rooms will be un-occupied. Remember, do not pay for thing that you do not need.

Q2) Do I need to have a car?
Car can be an asset if it can bring in money. How? For example, if you are a housing agent and you can drive your clients to see houses. It helps to provide good service which increase the chances of making a deal. But if you just buy a car to drive from home to office and from office back home, basically you are under utilising your car. The car did not bring in money, and instead take away your money. It will become a big liability. So if your work required very little on car usage, I suggest you don't buy it. A car costs about $50000 to $100000 excluding all the ridiculous miscellaneous cost. Why not use it for investment since you have the intention to waste it on a car?

From today onwards, if you don't buy any "GOOD TO HAVE" items and don't overbuy the "MUST HAVE" items, sooner or later your liabilities will be reduced to zero.

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