Total Liabilities Formula: Know What You Owe
Your total liabilities play a critical role in your financial health, but you don’t need a complex formula to sort it out.
Contributing Writer at Tally
March 29, 2022
When determining your overall financial wellbeing, several variables come into play. One variable is total liabilities. Adjusting your total liabilities is one way to make progress when making positive strides in your financial health.
But what are total liabilities, and do you need a complex total liabilities formula to figure them out? We cover that as well as how to trim your liabilities below.
What are liabilities?
Liabilities are any obligation you owe to a person or entity that you’ve yet to fulfill. In short, it’s essentially the total debt you have and will pay off over time.
Liabilities don’t always have to be financial, though. They can also be:
Cash equivalents owed
Liabilities can be a range of items, including rent, utility bills, credit card debt, child support, car loans and more.
Types of liabilities
There are three core liability types: short-term, long-term and other.
Short-term liabilities — also called current liabilities — are due within a year or less. This short-term debt includes a wide range of payables, including:
Personal loan payments
Income tax bills
Real estate taxes
Sales tax owed
Long-term liabilities — also called noncurrent liabilities — are obligations that aren’t due for over one year. These long-term debts are more common in business balance sheets than in personal lives, but an example of this could be deferred student loans or deferred income tax.
Some liabilities don’t fit neatly into the long- or short-term category, such as quarterly income tax payments or insurance premiums.
The total liabilities formula
There’s no need for a complex accounting equation to find your total liabilities. Simply list all your financial obligations and their totals, which you can obtain from your monthly financial statements, on a sheet of paper or enter them in an Excel spreadsheet. Add all the debt amounts together, and the results are your total liabilities.
Using this template, if you have:
$10,000 in credit card debt
$15,000 car loan
$500 per month in child support
Your total current liabilities are $25,500 ($10,000 + $15,000 + $500 = $25,500).
Why liabilities are important
Without the full picture of your financial situation, your total liabilities may look like a random number. However, total liabilities play a critical role in calculating an important figure: net worth.
Net worth is total assets minus total liabilities. You can have a positive or negative net worth. If you have more assets than liabilities, your net worth is positive. Your net worth is negative if you have more liabilities than assets — the lower your liabilities or the higher your current assets, the larger your net worth.
Some lenders consider net worth when borrowers apply for a large loan, like a small business loan or a mortgage.
There are also two types of net worth: total net worth and liquid net worth.
Total net worth is as defined above: assets minus liabilities.
Liquid net worth is the amount of cash or cash equivalents you have available minus any liabilities. It’s possible to have a high total net worth with little to no liquidity.
Why you should minimize your liabilities
Liabilities aren’t always bad. However, as a general recommendation, lowering your liabilities is positive for a few reasons.
Frees up cash flow
With liabilities come debt payments. Whether they’re monthly, quarterly or annually, these debt payments put a strain on your budget. You can free up more working capital for important things like retirement savings by paying off liabilities.
Saves you money
Since liabilities are debts, they often include interest payments. High-interest-rate debt, like credit cards, can take many years to pay off and cost you more in interest than the purchase price. You reduce the interest you accrued by paying off your liabilities, allowing you to have enough cash to reach other financial goals.
Reduces your debt-to-income ratio
Because many liabilities require a monthly payment, they directly impact your debt-to-income (DTI) ratio. Creditors will check your DTI when you apply for a mortgage or loan. If your DTI ratio is too high, you may get declined for the loan, even with great credit.
Paying down these liabilities reduces your DTI ratio and improves your approval chances.
How to reduce your liabilities
You can reduce your liabilities by paying down your debt, whether it’s student loans, credit cards, car loans or other debt.
Debt avalanche method
With the debt avalanche method, focus all your extra money on the debt with the highest interest rate while continuing to make the minimum payments on your other debts. Once you pay off one debt, you move to the one with the next-highest interest rate while making the minimum payments on all other debt.
Repeat this process until you’ve paid off all your debts.
Debt snowball method
With the debt snowball method, focus all your extra money on the debt with the lowest balance while continuing to make the minimum payments on your other debts. Once you pay off one debt, you move to the one with the next-lowest balance while making the minimum payments on all other debt.
Repeat this process until you’ve paid off all your debts.
If you have multiple high-interest debts, you can use a lower-interest debt consolidation loan to pay them off. This will not only reduce the number of payments you make each month, but the lower interest rate could save you money and time. With the right interest rate and repayment term, you may even reduce your total monthly payments.
Line of credit
You can also opt for a line of credit with an interest rate lower than your high-interest debt. You then use that line of credit to pay off one or more high-interest debts, which could save you money on interest charges and shorten the time to repay the debt.
The final payoff method to consider is a balance transfer credit card with a promotional APR — preferably 0% APR — for a fixed term. These promotions are often 0% APR for 12 to 18 months, giving you an extended period without interest charges.
Use this credit card to pay off your high-interest debt, then pay off the balance transfer credit card within the promotional period and incur no interest charges.
Limiting total liabilities is your ticket to financial freedom
Total liabilities are all the obligations — financial obligations and non-financial obligations with a value attached to them — that you owe to a person or entity. Limiting your liabilities not only increases your net worth but also makes it easier to get approved for important loans and can decrease the amount of interest you pay.
Fortunately, there are plenty of ways to reduce your liabilities.
If a line of credit is your tool of choice to pay down your liabilities, the Tally† credit card debt repayment app can help. The app helps you manage your credit card payments, and Tally offers a lower-interest line of credit, allowing you to pay off higher-interest credit cards efficiently.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.