In a previous post, I wrote about why I prefer to say personal economics as opposed to personal finance. I explained that personal economics involve a whole lot more than just managing one’s money. It involves different capitals (other than financial capital) that are influenced by your life choices.
The idea of different capitals is nothing new. In the past, people traded skills and merchandising, without necessarily having money change hands. People relied on their neighbours for support and had a number of skills that were used to meet different needs. Some of those skills are still relevant, but not necessarily all of them. Hunting for food is a skill that can be useful in certain situations, but it’s not necessarily relevant for most people who have access to a supermarket (or who are vegetarian like myself :)).
Even though types of capital have always existed, I don’t see people in the personal finance world talk about them much. Maybe Jacob from Early Retirement Extreme is one of the few. But the truth is that understanding different capitals can change your approach to financial independence, and even make you a more complete human being. At the end of the day it is not all about cash.
Here I list 4 types of capital (not financial capital) that can help your financial independence.
Social capital refers to the value that interpersonal relationships and social networks brings. When people interact positively in a social network, they tend to support each other and act in ways that are mutually beneficial.
Social capital may mean knowing someone who can help you out in times of need, but it also may mean working together with others to achieve shared goals. A union is a good example of how collective efforts can benefit a group of individuals.
How can social capital affect your financial independence? If you have a social network to rely on, you will likely need to spend less money. Here are some examples of how:
- You can borrow items that you only need to use a few times, instead of buying them;
- You might know someone who can do you small favours, such as fixing something around the house;
- You might have a couch to sleep on when you are out of town;
- You might get hand me downs;
Of course you should always return the favour. In the same way that others help you out, you should offer your skills and resources to help others. If you want community, you also need to be community for others. This approach is not only financially efficient, but also environmentally responsible and I would also say that having a community to rely on increases your overall happiness.
Intellectual capital refers to the value that expertise, information and critical thinking brings. It’s hard to put a price on your ability to think and problem-solve, but those qualities are assets that need to be valued.
How can intellectual capital affect your financial independence? If you can have good general knowledge, think critically and creative problem-solve, you will be more resourceful and need less money to solve the same problems as others. Here are some ideas of what you can do:
- Think critically about what you actually should spend money on;
- Respond creatively to demands of others;
- Solve problems creatively rather than by spending money;
- Insource jobs that require skills that you have or can acquire.
This term is often included in the more general term “human capital”. However, Grossman introduced the term “health capital” as a separate concept. In his view, health is considered a capital that yields healthy time available for producing and earning. His model also considers that health depreciates over time, and can also be invested in.
How can health capital affect your financial independence? If you’re still working for money, your health can obviously mean the energy and vitality to produce and earn money. In the same way, sick days inccur a reduction in your income as well as opportunity costs. Costs of medical care also need to be factored in.
If you are no longer working for money, investing in health capital can:
- Reduce the need for expensive medical treatments
- Reduce costs associated with tasks that you are fit enough to perform yourself
- Generate vitality to work on projects that interest you and that might earn or save money
- Generate vitality to help others in your community, and help you build your social capital.
Perhaps the idea of helping others as a way to build your social capital might come across as a bit selfish. This is not the intention. As I mentioned above, being a community is a reciprocal effort. However, this is part of systems thinking. It is a desirable output generated by the input of helping others.
Similar to intellectual capital, experiential capital relates to knowledge. The main difference is that experiential capital relates to the knowledge acquired through a variety of experiences, while intellectual knowledge can be gained through reading, studying and thinking. You can build your experiential capital through activities like travelling, working on projects, trying and sometimes failing, relating to different people, etc.
How can experiential capital affect your financial independence? If you can have knowledge and skills acquired through a variety of experiences, you tend to develop strategic thinking, know-how and a can do attitude. Here are some ideas of what you can do:
- Use your life experience to help you solve problems;
- Work hands-on on different projects;
- Be confident to tweak with current systems to achieve solutions.
I like to think of personal finance as a personal economics system. The different capitals above are important components of this system. What other capitals are important for your financial independence? Let me know in the comments 🙂