Liabilities
What you owe to others or have borrowed from them, such as a home loan, a car loan or money borrowed from a person. Assets minus liabilities gives your net worth.
In plain language
Liabilities are what you owe. The booklet's definition: "items which you owe to others or have borrowed from others are your liabilities."
Its example: "if you borrow funds/take a loan from a bank or any individual, it is your liability." Note the words "or any individual". Money borrowed from a friend or relative is a liability too, even with no paperwork.
Liabilities are not always bad. A home loan can help you own a house. But every liability is a promise to pay, and it reduces what you are really worth.
That is why financial planning starts by writing down both what you own and what you owe.
How it works
Liabilities and net worth (Chapter 3): "Your net worth is simply assets you own minus liabilities you owe."
The booklet's table:
| Assets | Rs | Liabilities | Rs |
|---|---|---|---|
| Car | 25,000 | House loan | 20,00,000 |
| Bank balance | 5,00,000 | Car loan | 10,000 |
| House | 50,00,000 | ||
| Total | 55,25,000 | Total | 20,10,000 |
Net worth = 55,25,000 − 20,10,000 = Rs 35,15,000
Where liabilities come from (Chapter 2). "Money borrowed to meet shortfall of money when expenses are more than the funds available in hand is called debt." Chapter 3 even writes "liabilities/debts" together.
How they are created (Chapter 8). Borrowing is "taking money and paying it back over a period", often through EMIs. The booklet lists personal, vehicle, education, gold, housing, agriculture and consumer durable loans.
Keeping them under control (Chapter 8, tips to avoid a debt trap):
- Do not buy more than you can afford, and do not get lured into "WANT" items.
- A long home-loan tenure does not mean you must take that long to repay.
- Credit cards are for making payments, not for borrowing. Never treat them as free money.
- Stop the activities that result in debt and change your lifestyle to save more.
A worked example
Amounts are illustrative.
Rakesh, a shop owner in Jaipur, lists what he owes:
| Liability | Owed to | Amount |
|---|---|---|
| Home loan outstanding | Bank | Rs 18,00,000 |
| Credit card bill carried forward | Bank | Rs 42,000 |
| Money borrowed for his sister's wedding | His uncle | Rs 1,50,000 |
| Total liabilities | Rs 19,92,000 |
He had left out the uncle's loan at first because there is no written agreement. The booklet's definition includes money borrowed from any individual, so it goes in.
His assets (house, shop stock, bank balance and gold) total Rs 42,00,000.
Net worth = 42,00,000 − 19,92,000 = Rs 22,08,000
Two of his liabilities break the booklet's tips. The credit card balance is being used to borrow, which Chapter 8 says a card should not be used for. So Rakesh clears the Rs 42,000 first from his bank balance. His assets fall by Rs 42,000 and his liabilities fall by Rs 42,000, so his net worth stays the same, but he stops paying card interest.
Why NISM asks about it
Chapter 1 (Introduction) lists liabilities among the four things to manage; Chapter 2 (Key Concepts in Personal Finance) defines assets, liabilities and debt; Chapter 3 (Financial Planning) calculates net worth. Chapter 8 (Borrowing-Related Products) covers loans and the debt-trap tips. Expect a definition question and a net worth calculation.
Common exam traps
- Money borrowed from an individual is a liability, not only bank loans.
- Net worth = assets − liabilities. An option adding them is wrong.
- Paying off a liability from savings does not change net worth; it lowers assets and liabilities by the same amount.
- A liability is owed; an expense is spent. A loan EMI repays a liability; rent is expenditure.
- Credit cards should be used to pay, not to borrow, per the booklet's tips.
Check yourself
1.According to the chapter, proper management of income, expenditure, assets and liabilities leads a person to which situation?
- a)Guaranteed profits from the securities market
- b)Better financial well-being
- c)Returns higher than the market average
- d)Complete elimination of investment risk
Show the answer
Answer: (b) Better financial well-being
The chapter ends its promise at "better financial well-being" — and where the promise stops is exactly what is being tested. Financial education is never claimed to produce guaranteed profits, market-beating returns or the elimination of risk. It could not: Chapter 3 will state plainly that "risk and investing go hand in hand" and that risk is "the probability or likelihood of a loss occurring in relation to your expected returns". Whenever a Chapter 1 option upgrades the promise into certainty or outperformance, it is a distractor. Well-being is a state — obligations met, goals funded — and a person with modest money and a clear plan can have more of it than a person with a large unplanned heap.
2.Financial education helps people develop a positive attitude towards managing which four things?
- a)Income, expenditure, assets and liabilities
- b)Savings, investments, insurance and pension
- c)Shares, bonds, mutual funds and gold
- d)Salary, bonus, rent and interest
Show the answer
Answer: (a) Income, expenditure, assets and liabilities
"Financial education helps people in being financially literate and develop a POSITIVE ATTITUDE towards managing their INCOME, EXPENDITURE, ASSETS AND LIABILITIES properly, which would lead them to a situation of better financial well-being." That quartet is worth memorising in order, because the next two chapters are built on it: income minus expenditure gives savings (Chapter 2), and assets minus liabilities gives net worth (Chapter 3). Option (b) lists products and outcomes rather than the four base quantities; option (c) lists asset classes; option (d) lists four sources of income, which are all inside the first noun.
3.A household knows its income, its assets and its outstanding loan, but has never recorded what it spends in a month. Which figure can it therefore NOT compute, and why does that matter most?
- a)Net worth, because expenditure is subtracted from assets
- b)Savings, because savings is income minus expenditure — and without it the household cannot commit to any monthly plan, SIP, premium or contribution
- c)Its liabilities, because expenditure and liabilities are the same thing
- d)Nothing important — expenditure can always be estimated later
Show the answer
Answer: (b) Savings, because savings is income minus expenditure — and without it the household cannot commit to any monthly plan, SIP, premium or contribution
Net worth is assets minus liabilities, so the household can already compute that. What it cannot compute is savings, which Chapter 2 defines as the surplus of income over expenditure — and savings is the number every later chapter depends on. A recurring deposit, a systematic investment plan, an insurance premium, an NPS contribution and a loan EMI all require a reliable monthly surplus figure; without it the household is guessing, and a guess that turns out too high produces a lapsed policy or a defaulted EMI. This is why the chapter places "proper management of income and expenditure" at the foundation of the list. Note that liabilities are what you owe, not what you spend — a distinction option (c) blurs deliberately.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- AssetsThings you own that have economic value, such as a bank balance, a fixed deposit, a house or a car. Assets minus liabilities gives your net worth.
- Credit scoreThe number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
- ExpenditureMoney spent on various items, both essential and non-essential. The booklet teaches you to save first and treat expenditure as what is left: Income − Savings = Expenditure.
- Financial planningThe process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- OverdraftA bank facility that lets a customer take a short-term loan to meet urgent needs, and repay it within the timeline agreed with the bank. PMJDY accounts carry one, limited to one account per household.
- DebtMoney borrowed to cover a shortfall, when your expenses are more than the funds you actually have in hand — the booklet's own one-line definition.