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Liability Management in the Household

PropertyAccess Team |

Liability management became a key element in running corporations following the Asian financial crisis of 1997, which was brought about, at least in the case of the Philippines, by heavy borrowings to finance investments in the booming real estate sector the early nineties.

Many companies collapsed because of their failure to pay their debts, many of which were denominated in US dollars — the debt amortizations increased when the peso dropped in value vis-à-vis the dollar.

Some of the companies that were hard-hit by the crisis are still paying for their old debts. In general, liability management became one of the most important lessons from the crisis: debt must be handled with utmost care.

Businesses continue to borrow, but with more prudence: sources of payments for loans must be identified and assured before signing the loan documents.

The government also borrows; it is, in fact, the number one borrower, with more than P4.5 trillion in outstanding loans (for the national government only) as of June 2010. The frequently reported projected fiscal deficit of P325 billion for 2010 refers to the amount that the government must borrow to fill the gap between its estimated earnings in the form of taxes and fees this year and the amount it will spend, based on the budget approved by Congress.

Also frequently reported in media are the efforts of the government’s economic managers to increase revenues and reduce spending so the deficit will stay below but not above the target.

That’s liability management, which can also be applied in the household or personal finances. Debt is a convenient, if not essential part, of urban life. It is convenient and safer, for example, to pay for the weekly groceries through credit cards instead of cash. As long as the purchases are paid on or before the due date, then there are no added costs. That’s also one of the applications of liability management.

Purchases of higher-priced items like appliances may now be paid for longer periods like 12 months, without interest, so the family or an individual consumer need not come up with a large amount of money up front. Just make sure the amortization is paid promptly — that’s good liability management.

There are other aspects of everyday life where good liability management can be applied to make borrowings — like home loans — convenient and affordable. Good liability management, plus prudent spending, should make urban living an enjoyable experience.