When people think about capital, they think about a stack of money. There are in fact four types of capital which I will explain below:
1. Financial Capital
Financial capital is just a pile of money. It is the accumulation of money and other assets that can be used to invest.
2. Personal Capital
Personal capital is what you invest in yourself. Think of all the books that you have read, the times you have gone to the gym, and the life skills developed. You are making deposits in yourself and growing your own personal capital.
3. Emotional Capital
Emotional capital is grit and fortitude. It can help you do two things. (1) It can help you withstand emotional blows, such as a failure of a big project or the death of a loved one. (2) It can give you the enthusiasm to start a new business or pursue a new hobby. Emotional capital is the belief in yourself that pushes you forward even as adversities mount.
4. Social Capital
Social capital is the people that you now 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.
You should strive to have all four forms of capital. If you only have one, but the other three are at zero, you are going to have an unbalanced life.
The majority of lottery winners go bankrupt after a few years of receiving their money. They suddenly receive a windfall of financial capital WITHOUT the personal, emotional, and social capital that comes with it if you are self-made.
Some Capital Can Be Inherited
Some capital can be inherited if one is lucky enough to be born into the right womb. I once saw a picture of Tom Brady’s family, and his kids were as beautiful as their father and mother. Presidential candidate Mitt Romney is a remarkable case. His family meets together four times a year and the Romney men gather around and talk about their businesses and have the others give them critiques of what they are doing wrong.
But the Majority of Capital is Built by Yourself!
However, the majority of capital can be built by oneself. Even though you might not be born to Cindy Crawford, one can always go to the gym and maintain a healthy lifestyle and be more attractive physically than the majority of people in your age bracket. In the case of financial capital, one can build wealth over time with prudent spending and financial management.
Capital Goes Up and Down, but Add to Your Total Capital Stock!
Each of these forms of capital may go up and down at different points in your life, but always aim to add to your total stock. If you spend money on a fancy gym, you are reducing your financial capital in the short-term. If you are going there every day, you improve your personal capital through exercise. However, the health benefits may outweigh the $200 a month you are spending for the gym membership. Always make sure your TOTAL capital stock is going up.
Diminishing Returns to Each Form of Capital
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. Strive to maximize all four forms of capital to get the best return on investment.