This is Part 8 of my nine-part series connecting financial frameworks with personal growth.

1.      Finance as a Framework

2.      Assets = Liabilities + Equity: What You Own Comes with Strings Attached

3.      Assets = Liabilities + Equity 2: What You Have vs. What You Can Use

4.      Time Value of Money 1: The Power of Compound Interest

5.      Time Value of Money 2: Why Humans Use Bad Discount Rates

6.      Risk and Return 1: No Risk, No Return

7.      Risk and Return 2: Why Humans Are Bad at Calculated Risks

8.      Risk and Return 3: Diversification, Finance’s Only Free Lunch

9.      Conclusion: The Emotional Audit

Over the past two months, we’ve looked at personal growth through the lens of financial concepts. My core thesis is that financial management and emotional development share structural similarities.

This week, we’ll tie the concepts together by looking at the “emotional balance sheet,” or, in which ways we are using these financial concepts for our gain and where can we stand to improve. Let’s begin by reviewing the core concepts themselves.

The Core Concepts of Finance

Assets = Liabilities + Equity

Assets = Liabilities + Equity, or the “balance sheet identity,” shows us that the difference between what we own (assets) and what we owe (liabilities) is our true net worth (what we have left after we pay off all our debts). Assets, without taking into account the corresponding liabilities, do not by themselves reflect our wealth. A related concept is liquidity, or the idea that assets we can’t use to solve problems (aren’t liquid) aren’t much good. It’s risky to be in a spot where we have a lot of assets but we can’t use any of them to deal with short-term emergencies.

Time Value of Money

The Time Value of Money is the idea that a dollar today is (usually) worth more than a dollar in the future, because the dollar today can be invested to earn additional dollars. It rests on the concept of compounding, which refers to money earned through investment can itself be invested, leading to exponential growth.

Risk and Return

Risk and Return go together in finance. The safest investment option usually yields little in terms of return or compound interest, so if we want higher returns, we usually have to accept higher risk. However, there are two ways to get around this relationship and earn higher returns with less risk. The first is that risk and return can be mispriced, meaning that people sometimes mistake an investment as being more risky than it truly is. Second, diversification offers a way to maintain high returns while reducing risk by making several smaller investments at once—if one investment does poorly, others are likely to make up some of the shortfall.

The Inherent Duality of Finance

If there’s a single thread for me to weave between the three concepts, it’s that “the good doesn’t come without the bad.”

Acquiring an asset usually involves incurring a corresponding liability, at least at the beginning. Making money requires compounding over a long period of time (patience). Return doesn’t come without risk.

Outside of the realm of money, the same concept holds. Nothing worth having comes without some kind of strain, burden or effort. If we could get valuable things with no expenditure of physical, mental or emotional effort, everyone would have the thing and it probably wouldn’t have much value.

Embrace the “Bad”

To distill all of these ideas into one guiding principle, I offer: “Can I look for the ‘bad’ things that I know carry good things with them?”

Can I look for places where I can take on liabilities (leverage), that after paying them down, turn into unencumbered assets that increase my net worth? (Another way to frame Assets = Liabilities + Equity in a personal context would be Strengths = Burdens + Growth.)  Can I look for places to make consistent, small investments over a long period of time that I know will ultimately snowball into something spectacular? Can I look for all the scary things that other people have mispriced, knowing that it probably means there are fat returns to be found there?

In a way, what I am describing is just process-oriented thinking. Most people are goal-oriented—they have a specific objective they want to achieve and they figure out how to get there. I’ve more or less abandoned goal-oriented thinking and focus much more on process—what are the actions I can take (actions are expenditures of energy!) that if done consistently over a long period of time, lead to somewhere good? Writing this blog is a perfect example. I have no goals for audience size, monetization, etc. I just know that if I write consistently over a long period of time, something out of this activity will snowball and compound into something pretty great for me.

The Personal Emotional Audit

To make all of this actionable, we’ll wrap this series up with a personal emotional audit. The guiding principle for this audit is asking ourselves where we are taking things too easy or where we are taking the path of least resistance. To be clear, this is about breaking patterns that no longer serve us. “Embracing the bad” does not necessarily mean “doing more stuff.” So if you are overextended on the personal balance sheet by having too many commitments (liabilities), the difficult area of growth is learning how to say no and shrinking the balance sheet by removing liabilities and accepting that some assets are just not going to be in play for the time being.

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If you’ve been following this series since inception, thank you for staying with me over the last two months. These posts have been fun to write and I hope they have been fun and useful for you to read. If you have any thoughts, reactions or feedback, I would love to hear from you!

I’ll be back next week with my regularly scheduled programming. But for now, here is our exercise!

Exercise

Journal on the following or discuss with a friend.

1)      Audit

Viewed from the lens of the three financial concepts—assets = liabilities + equity, time value of money, and risk and return—where am I “avoiding the bad”?

Am I unwilling to accept burdens (liabilities) that can lead to growth? Or have I overcommitted with too many liabilities, and need to learn how to shrink the balance sheet (learn to say no and accept prioritization)?

Am I unwilling to make a steady, consistent investment in something, perhaps because I am not certain about exactly what the positive result will be?

Am I playing it safe, unwilling to accept risk and embrace fear, and forgoing outsize returns as a result?

2)      Prioritize

When faced with too many competing energy expenditures, the mind often shuts down and paralyzation and inaction become the result.

Out of all of my choices, what is one area of my life where “embracing the bad” would make a big difference? (Notice I didn’t say “biggest.” You don’t need a perfect answer, you only need a good answer.)

3)      Action

What is the smallest action I can take towards embracing the bad, knowing that according to finance, the good automatically follows, even if I don’t know exactly what the “good” is? Choose one of the financial principles to guide you.

What’s a burden I’m willing to take on today that eventually turns into an unencumbered asset? Alternately, where can I cut down and say no and prioritize, improving my liquidity situation?

Where can I commit to a small, consistent action that leads to a compounding outcome, even if I don’t know exactly what the outcome will be?

Where can I embrace a fear that other people consider dangerous (and is therefore likely mispriced), knowing that returns are almost certain to come with it?