When people think about capital, they think about Karl Marx’s Das Kapital and money as if it were the only kind of capital out there. In fact, there are four types of capital in this world which I’ll explain below:
1. Financial Capital
Financial capital is basically just a pile of money.
Financial capital is the accumulation of money and other convertible assets that can be used to invest in other businesses or larger assets.
2. Personal Capital
Personal capital is what you invest in yourself.
Think of all the books that you’re read, the times you’ve gone to the gym, and the life skills you’ve developed. You are making deposits in yourself and growing your personal capital.
3. Emotional Capital
Emotional capital is grit and fortitude.
Emotional capital can allow you to do two things. (1) It can help you withstand emotional blows, e.g. the failure of a big project or perhaps a death of a loved one. (2) It can give you the enthusiasm or emotional energy to start a new business or pursue a new hobby or something new. Emotional capital is the belief in yourself and your strength of character that pushes you forward even as adversities mount.
4. Social Capital
Social capital is the people that you know and the favors they can do for you.
It comprises of the people around you, your social milieu, and the favors that those people can do for you.
Why Is This Important?
Some of this capital can be inherited if are lucky enough to be born into the right womb. For instance, I once saw Tom Brady’s son; he was handsome like his father. The Rockefellers inherited financial capital from their patriarch, John D. Rockefeller. The family of Mitt Romney is a remarkable case. They meet together three or four times a year for Thanksgiving, Christmas, and Easter, and the Romney men gather around and talk about their businesses and have the others give them critiques of what they’re doing.
However, the majority of this capital can be built by oneself. In the case of personal capital, even though you might not be born to Cindy Crawford or David Gandy, you can always go to the gym and maintain a low body-fat-percentage and be more attractive than 95% of the people in your age bracket. In the case of financial capital, you can build wealth over time with careful spending habits and great financial management.
You should strive to have all four forms of capital. If you only have one (say financial capital), but the other three are at zero, you’re going to have an unbalanced life. Think of the percentage of lottery winners who have gone bankrupt within 5-years of receiving their windfall, or the number of celebrities that have taken drugs to ameliorate a problem and have overdosed.
Each of the four forms of capital may go up and down at points in your life, but always aim to add to your capital stock. For instance, if you spend money on some fancy gym, you’re reducing your financial capital. However, if you’re going there every day, you improve your personal capital as your body gets stronger and you get fitter and more attractive. All of a sudden, being more attractive, you have greater social access and have more emotional capital because of greater confidence with the opposite sex. Even though your financial capital has gone down by $150, your personal, social, and emotional capitals have gone up significantly. Always aim to increase your TOTAL capital stock.
Diminishing returns. The happiness you obtain from going from $0 to $1 million is much higher than from $1 million to $2 million. The same goes for the other three forms of capital as well. Strive to maximize all four forms of capital evening to get the best bang-for-your-buck in terms of happiness.