What is a liability?

A liability refers to a financial obligation or debt that an individual or organization owes to another party. This concept includes various forms of debt, such as loans, mortgages, credit card debts, and other financial responsibilities that require future payment.

Understanding liabilities is crucial in personal finance because they impact your net worth and overall financial health. By recognizing what constitutes a liability, individuals can better manage their debts, plan for future expenses, and make informed decisions about borrowing and spending. Liabilities represent claims against assets, meaning they can affect your ability to achieve financial goals if not managed wisely.

In contrast, the other options do not accurately define a liability: a savings account that earns interest is an asset, investments in stocks and bonds are also considered assets, and profit generated from an asset is indicative of income rather than a liability. Therefore, recognizing liabilities is essential for achieving financial literacy and stability.