October news article

The Power of Capital

As we grow through childhood and into adulthood, we are instinctively and deliberately taught that the value of money lies in our ability to buy consumer goods and to be able to do things. This is of course correct in as much as these purchases allow us to cover our basic needs such as shelter, security and nutrition. It also allows us to undertake travels, such as getting to and from work and also for the purposes of socialising. Given this, it is quite understandable that this becomes the basis for our understanding of what money can deliver for us.

Without going into how money is created and what its true purpose is in an economy, it is sufficient for this article to know that we are pre-programmed to take our experience of money in early life and adulthood to the point that we extrapolate that experience to conclude that this is the full importance and function of money and thus capital.

However, the clear truth provided by good financial planning is that this is the wrong way of looking through the ‘cash telescope’.

The true long term power of amassing capital beyond day to day needs lies not in what it can buy for us (beyond our basic needs). The power of capital lies in its ability to ensure that you do not have to do or buy things that you do not want to. Thus the common viewpoint that capital allows us to buy a new car or a once in a lifetime holiday is not wrong in itself, but these are ‘starburst’ events and do not provide long-term happiness or peace of mind. Where capital can be very beneficial to our health and happiness is when excess capital and savings is used to ensure that we do not have to undertake work or be in places that we do not want to be, for example:

1. We do not need to live in an unsuitable area that we do not like or is not convenient.
2. We do not have to continue in jobs that make us unhappy simply to pay the rent.
3. We do not have to send our children to schools that do not best suit their needs.

It may seem fairly obvious written down like this, but my experience of 30 years in the financial services industry is that only a minority of people see matters in this light. For many, capital remains something to spend on the luxuries in life but in doing so they over extend themselves or leave themselves short of capital to meet life objectives. This tendency undermines peace of mind and security and all the health benefits that can bring.

The truth is that savings well directed and capital well used can mean that we enjoy healthier and happier lives. Do not confuse ‘starbursts’ with what capital can beneficially do for you; after all a new car doesn’t retain its new gleam and allure for long.

Published by – Mike Watson