Karthik Pasupathy (aka KP)

Liabilities are good in low doses

I recently attended a financial planning workshop and the hosts kept talking about “liabilities” and how they’re bad for us. There are two misconceptions about the word “liability”. One is they’re always mapped to loans and other financial commitments. Second? Liabilities are considered bad and are asked to be kept out of one’s life.

I don’t think it’s that black and white. Liabilities fall in the grey area. So, I let my thoughts run their course and see what I think about “liabilities” in life. I ended up with two opinions. 

First, it is not a liability if it gives us immense happiness and fulfillment. I have my own example. 

A year after I got a decent job, I went out and took a car loan. The EMI was a quarter of my monthly salary, and the fuel costs took some more from my tight monthly budget. 

From the perspective of a financial planner, it would’ve made no sense for someone to pay a quarter of their salary on a “depreciating asset”. But it made sense to me. I explored new places, met amazing people, and drove around the city at random times irrespective of the weather. I enjoyed every moment with my car. Was it a liability? Yes. Was it a depreciating asset? Yes. Was it a wise decision? No. But was it all worth it? Absolutely!

For some people, it is their lifelong dream to own a car or buy a house. They work hard to get to a point where they can afford to get a loan to buy their dream car or house. For them, it’s more than numbers. They share an emotional connection with the goal. Those people won’t see the loan as a liability, but will see it as their path to “getting settled in life”. 

My second opinion is, liabilities are constantly changing. Let’s say you finish off all your loans and start your own company. Does that mean you’re free of all liability? Not really. You’re now liable to your customers, investors, and the welfare of your employees (and you’re always liable for the welfare of your family members who’re dependent on you). The only thing that changes is that once you become a founder, you’ll be liable for different things. 

I personally feel that we need low-dose liabilities to keep us on track. In my case, I would quit my job any day to start something if I had no liabilities. I’ve done that twice in the past. And it didn’t go well for me. So, I always make sure I have a small loan on the side to keep me at my job. Whatever ideas I have, I experiment with them on the side. 

So, take any advice on liability with a pinch of salt. It’s not a framework that works for everyone. Analyze your priorities and decide what you need and what you don’t.