Throughout your time on this planet many things will move in and out of your life. Some will be good and some will be bad, but everything will have a role in shaping who you are and where you end up.
There will be things you welcome into your life, such as nice cars with drink holders big enough to fit your over-sized protein shakes, big televisions you can watch the Playboy channel on, and friends in high places who can get you into nightclubs without waiting in line. You will welcome these things and people into your life because they have value and and fulfill your needs. In accounting, we refer to these things as assets.
There will also be things you would rather not have in your life. These are things like a mortgage from the bank with a zillion percent interest rate, or a debt from a dodgy loan shark named Toothpick to fuel your online poker addiction. In accounting we refer to these as liabilities.
The difference between an asset and a liability is probably the first thing you will ever learn in accounting class (if you’re not asleep already). In layman’s terms, an asset is something you own, while a liability is something you owe. Assets are good and liabilities are bad. If you have many assets and few liabilities, you will be rich. In accounting, we refer to this richness as equity.
After reading the work of several accomplished investors, my view of assets and liabilities changed. I learned assets were no longer things I owned, but were only things I owned that brought money into my life. Liabilities were things I owned that took money out of my life.
An accountant would tell you a car is an asset because it’s worth money and you own it, but to an investor it is a liability, because it causes you to spend thousands of dollars on petrol, warrants, insurance and servicing, but doesn’t produce any income.
I started viewing many textbook assets such as houses, bikes and clothing as liabilities, and it started becoming clear to me why so many people were struggling financially – because they were amassing “assets” that were only taking more money out of their lives.
I now look at life the same way. As we all know there is much more to life than money, so we should consider the assets and liabilities in our life from more than just a financial perspective.
I like to think of things from a point of happiness, or fulfillment.
A life asset is something that improves your happiness or quality of life.
A life liability is something that causes you stress or suffering.
A supportive group of friends would be extremely valuable assets, while a nagging, bitchy girlfriend would be a liability.
For a healthy life you would therefore aim to spend good amounts of time with your friends and then try to amass even more quality friends, or assets. In accounting, we call this capital investment. You should also aim to make the unpleasant girlfriend an ex-girlfriend as fast as possible. In accounting, we call this a disposal.
The next thing we learn about in accounting class is the concept of capital. Capital refers to the resources that you, the owner, have available to generate wealth in your life. Of course, in this context wealth simply means happiness. What resources do you have available to you to create happiness in your life?
Some people were lucky in life and were born with more capital than others. The short, pudgy, Shrek looking kid might look at the 6’2 rich-kid pretty boy with an overwhelming sense of envy and bitterness. But many of the world’s most successful people forged their destinies with a modest amount of life capital.
To be a famous actor you’re supposed to be tall, have a six pack, and a head of perfect hair, but Danny DeVito is bald, fat, 5’1, yet became one of the most versatile and celebrated actors in Hollywood. He simply decided to be awesome and made miracles happen with his capital. A living legend.
Is life easier when you were born with greater capital? Probably. But that doesn’t mean you can spend your life complaining about it. Everyone has strengths and weaknesses in the game we call life, and everyone has the ability to win.
Easy or not, you take the capital you have and you build your empire.
You can’t win if you don’t play.
Danny DeVito is fat, short and bald, and reached the highest success in an industry where everyone is supposed to have abs and be tall with perfect hair. A legend.
During the course of building our empires we will all makes mistakes. Mistakes in life are simply things we do that are not successful in bringing us happiness. We might spend some of our life capital, such as our time, emotions or money, on things that don’t turn out the way we wanted them to. In accounting, we call these expenses.
A good example of this might be a bad relationship or a bad career choice. But expenses are not always a bad thing, and any successful businessman will tell you expenses are unavoidable. Our expenses in life are nothing more than experience in disguise.
As life goes on, some of our expenses will lead to victories. In accounting, we refer to these victories as revenue.
Revenue in life is when we succeed in something and receive a piece of happiness. Perhaps, after a few years of dating crazy bitches you find a sweet girl who is a joy to be with, or maybe after dating an Xbox-playing couch potato you meet a cool travel blogger whose name starts with B and ends in N.
A successful business cannot exist without reliable revenue streams, just as a successful life cannot exist without consistent victories. When you find a source of revenue or happiness, you must hold onto it, cherish it and duplicate it.
These are instrumental to a full and happy life.
Oftentimes people are unable to do this. Their expenses are too high and their revenues are too low or non-existent. For some people, just waiting in line at the bank will piss them off and ruin their entire day.
This is because they have no sources of revenue, or happiness, to offset this expense, or problem. They know after standing in this line they will need to go back to a job they hate, have no time to go to the gym to work off their pot belly, and will go home at night to someone they cannot stand. Eventually, it will take just one traffic jam or one drop of mayonnaise on their shirt before they lose their shit and have a total mental breakdown. In accounting, we call this bankruptcy.
This occurs when your expenses or struggles are through the sky, your revenues or victories are non-existent and you have no more will or capital to continue on. This is when you know it’s time to start over.
Eventually, you will find your path. If you don’t allow any negative energies into your life and only pursue things that bring you happiness, you will be able to minimise your expenses and maximise your revenues. You will be living a life of few mistakes and many victories. In accounting, we refer to this as profit.
Profit, or overall happiness, is achieved when our revenue is greater than our expenses. You might find yourself waiting in the same queue at the bank but you won’t be angry this time. You will be ecstatic, because perhaps you’re waiting in a bank in Hawaii or the Mediterranean – you’re on an exciting trip around the world and the revenue from this will far exceed the expense of waiting in a bank line.
When your revenues are so great and abundant, your expenses will seem so small you’ll barely notice them at all.
So, how do we live profitable lives?
We put ourselves in a position where our revenues can be high and our expenses can be low. The successful businessman will always ask himself whether his expenses are generating revenue or not. If not, he will cut the expense and allocate his capital elsewhere.
When you have something bringing you immense unhappiness, such as an unhealthy lifestyle, a toxic relationship or a shitty job, you always need to assess whether this is going to eventually produce some revenue or happiness in your life.
If your boss, business partner, girlfriend or boyfriend is driving you insane, ask yourself what revenue they are bringing into your life; are they bringing you closer to your dreams and goals? If not, you need to put them up for sale and give them the boot. In accounting, we call this reallocating capital.
Remember, your capital is scarce. Don’t waste it on expenses that aren’t worth it.
You will need to reallocate capital many times throughout your life. Your assets and liabilities are never set in stone and they can always turn from good to bad and vice versa.
You might have a boyfriend who has been a huge asset for many years and then suddenly turns into an alcoholic and sleeps with your sister. You might have a girlfriend who used to take your breath away and then she turns into a level 5 crazy with a moustache. In accounting, we refer to this as depreciation.
Sometimes the depreciated assets in your life can be restored with a little repairs and maintenance, but more often than not they will need to be removed from your life. In accounting, we refer to this removal as a write off. If you feel there are old assets lying around bringing negative energy into your life, don’t let them get too far. Write that shit off and move on.
You will make some enemies along the way. People you thought were on your side but really just used you as a stepping stone or a doormat. The simple fact is, most people resent those who go in search of big dreams, and you can’t allow this to stop you.
Surround yourself with people who lift you up, not bring you down. These are the people who will help produce revenue in your life.
As for the others, use them to motivate you. Prove yourself right and everyone else wrong. In business, we call these people competition.
Competition is always good for business.
Often the hardest thing about becoming profitable is changing direction. Many people go bankrupt because they couldn’t adapt to an unprofitable situation. In fact, in today’s world, the business environment changes so quickly that companies who fail to adapt disappear very quickly.
Life is no different.
When the iPod comes out, don’t be like Sony and keep making Walkmans hoping they’re going to make a comeback. You must change and adapt.
If your career is not producing happiness in your life, change it now.
If your relationship is a never ending source of stress, cut it now.
If your diet and lifestyle is making you cry when you look in the mirror, change it now.
You might be thinking, “oh but I’ve been working on this career for twenty years and it’s so stupid to change now”, or “we’ve been dating for 5 years and I just can’t do it”, but what has happened in the past is irrelevant. The fact you’ve already invested a lot of capital in something is not a good reason to keep it in your life.
In accounting, we refer to these as sunk costs.
The savvy businessman always removes sunk costs from the decision-making process because they are irreversible and therefore irrelevant. We do not look to the past, only the future.
Take a piece of paper and draw a line down the middle. On the left side write down all the things in your life that are making you happy. Then on the right side write down all the things that are making you unhappy.
In accounting, we call this piece of paper a balance sheet.
A balance sheet tells you whether or not your business is healthy. The piece of paper you have in front of you is now the balance sheet of your life. The goal is not dollars, but happiness.
If the right side of your balance sheet is overflowing and the left side is empty, your life is a mess. Your profits will be non-existent and investors would not be interested in touching you with a poop covered pole. In accounting, we refer to this as insolvency.
This means you will not be attracting many good people or experiences into your life. In fact, you will probably have many bad people coming into your life, some of whom will sense your weakness.
Perhaps an employer will see your dire situation and not bother giving you a payrise, because he knows you can’t quit anyway, or maybe some crazy will sense your loneliness and try and get close to you to take advantage of you. In accounting, we refer to this as a hostile takeover.
On the other hand, if the left side is full and the right side isn’t, your life is very attractive. Many people will want to invest in and be a part of it and you will have a life of high revenue, or happiness. Whatever expenses life throws at you will be manageable, because your balance sheet is so strong you will have nothing to worry about. You will also be in a position to be a positive influence on the life of those around you and the people you care about.
You might not have an overflowing bank account, but your life will be full of revenue streams of happiness you can share with those who are important to you. You win.
It’s time to size up your capital – the resources you have available to make a difference in the world and create your happiness. What do you have to offer? Size up your health, education, finances, your drive and your passion, your wit and charm, your friends and family, who you are and where you come from.
Do you feel like you have less capital than the next guy?
Life waits for nobody and you can get up and start moving or cry in the corner. Nobody cares.
Besides, we might start from different places but we’re all on the same rock.
Life is just a game. You’re dealt the cards you’re dealt.
To endless profits and happiness,
Brendan is a 29-year old Chartered Accountant who hopes to never work as an accountant again in this life or the next. He hopes you appreciated this attempt to make accounting interesting. If you are an accounting professor and have issue with how he defined the terms in his article above, you may leave your concerns in the comments section below. If you are an accountant reading this at work, please charge your time to brenontheroad.com. The reading of this article can be added to your CPD hours. Expected reading time is 15 minutes.
Love your work Brendan. I reckon you should do an article on what you put your money into nowadays in order to maintain the travelling lifestyle (e.g. dividends, term deposits, etc)
Sup Rich, there’s not much to say really – I keep it in mostly cash and liquid assets. But if my fortune grows I might put something together.
It’s taken me a long time but I now resonate with this way of thinking – to my ‘profit’.
It’s interesting to hear the same ideas coming from an accounting background; it fits better than I imagined it would.
Thanks Matthew. I don’t know where the idea came from, it just suddenly came to me and I spewed it out. Enjoy the profits 🙂
Mean reading as always man!!!!
Reading this while im in the office LOL .
I need to reallocate some capital as soon as im done with PCE!
Hope all is well man. When you back in Syd/ NZ?
Hey bro, I’ll be back around Nov!
That was amazing at the end! I fully plan to cite this as part of my required CPD Hours. But I milked it – took full 20 mins to read!
Cheers from Canada
Robin, CPA, CA
Haha mate you’ll have to take a screenshot of your CPD and share it here when you file!
Such a great way to get boosted and use simple accounting principles in your life, great Bren 🙂
Cheers, happy balance sheeting 😉
Great article. I read it and I totally understand what I need to do from now on. Thanks for sharing this!