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Four Types of Capital

Written by: Bill Sherman on Wednesday, 23 July 2008, 6:13 AM

Yesterday, I wrote that Social Capital can be compared to a bank account: you must make investments before you can make withdrawals. You can get “overdrawn” on social capital.

Let’s continue the metaphor of the bank account, and push it a little further. When you have a checking and savings account, you can make balance transfers. Capital works the same way.

Imagine that you receive an unexpected check in the mail for $1,000 in the mail. The giver has only one requirement. You must invest the money. You cannot “spend” it.

Many people might search for the best performing stocks and mutual funds. However, when you look at the concept of capital, you can make many different types of investments.

Let’s look at a few examples of how you could invest that money.

  • Invest in Financial Capital–put the money in your savings account or retirement account
  • Invest in Physical Capital–buy an asset that saves you time or increases your productivity
  • Invest in Social Capital–treat your friends to dinner or go visit distant friends
  • Invest in Human Capital–enroll in a college class, go to a conference, learn a new skill

Each of these choices could be viewed as investments (rather than expenses) under the right circumstances.  The $1,200 dollars you invest today could yield much greater dividends in the future.

We’re always used to thinking about “spending” money. Some of us say we don’t have much money to invest. In fact, in a tight economy, some might say they have “no” money to invest.

Can you think about the money you do spend and find ways to leverage them into investments? It requires you to shift your mindset to a different way of investing your money (and your time).

2 Responses to “Four Types of Capital”

  1. Joe Franklin Says:

    A few years ago, I had a friend who was working on her MA in poetics. As you probably well know, there’s usually not a lot of income coming in when you’re working on advanced degrees. She had posted in her blog about some financial problems, and I had just finished a batch of eBay auctions. I offered to help her out, financially, with no strings attached.

    Now she’s a PhD candidate in poetics out in NY, and has a book that will be released this year. By helping her out then, I strengthened our ties, and now I have more social capital in the publishing/creative writing arena.

    Hope this is what you meant!

    July 23rd, 2008 6:46 pm

  2. Bill Sherman Says:

    Joe, that’s a great example, and you’ve hit upon one of the very key aspects within the four aspects of capital. You can shift capital from one form to another.

    More importantly, you offered to help your without strings attached. You offered to help–because that’s how you work. You don’t keep score or expect quid-pro-quo. You’re naturally generous.

    If someone loaned money with the intention of “one day you will help me” that’s a transactional deal (much like a bank makes a loan).

    In your example, you invested in people and their success–without any expectation. That makes the difference, and you’ll often be pleasantly surprised by the results.

    July 23rd, 2008 11:18 pm

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