“WHAT a capital idea!” is a delightful British phrase Admittedly, it is old-fashioned but then so am I.
The expression is a classy upper crust way of expressing our approval of a nice notion or phenomenal plan or splendid scheme (in the best possible sense of that overused word).
Furthermore, now that I think of it, mankind’s creation of the economic concept of capital was itself — pun intended — a capital idea of the highest order.
All of us who are gainfully employed have the opportunity to accumulate capital for ourselves but whether we do so or not is up to us.
At its core, capital is money we use to try to make more money.
There are two sources of capital for regular people like you and me. Those sources reside on either side of the human equivalent of a corporate balance sheet.
BALANCING IT OUT
The balance sheet of a company comprises its assets (what it owns) and its liabilities (what it owes).
Similarly, an individual’s balance sheet lists his or her assets and liabilities and is more commonly called the net worth statement.
Each of us has a net worth statement comprising the value of each of our assets and liabilities, plus the respective totals of all those assets and liabilities.
As a result of those listings, we also have a ringgit-denominated net worth that equals Assets minus Liabilities.
Most people, however, don’t track those vital financial numbers. Perhaps because it has never occurred to them to do so or because they are too lazy. Those who do track their financial numbers consistently, however, tend to succeed better than those who don’t.
Therefore, I hope you will accept my unbiased, friendly advice to pull together your records to construct your own NWS (or net worth statement).
Your NWS, which you may construct with pen and paper or on an Excel spreadsheet,
has — as I mentioned — two halves: Your assets and your liabilities.
However, not all your assets or all your liabilities would or should count as personal capital.
I was discussing this with my friend and ex-boss
P. Gunasegaram, whom I bumped into recently. He was gracious enough to join me as I wolfed down a late lunch before shooting
off to Petaling Jaya for a client review meeting.
I have known Guna for 27 years, more than half my life thus far. He was the editor of Malaysian Business who hired me as a staff writer there in 1990, and was later the head of research at Standard Chartered Securities’ Malaysian operations when he hired me again in 1994, this time as an equities analyst.
I found Guna both times to be an approachable boss who derived deep delight in teaching economic, business and investment concepts to journalists and analysts with equal ease and skill.
IDEAS AND OUTCOMES
Over our recent meal, I mentioned my thrust for this particular column because I was mulling over its content.
As Guna is a lot smarter and experienced than I am, I grabbed the opportunity to discuss with him the theoretical underpinnings of capital.
As a financial planner who generally errs on the side of prudence to reduce investment risk levels, my preferred source of capital for those clients who view themselves as budding capitalists is their own savings.
Those savings are generated through delayed gratification, which encourages people to choose to delay expensive consumption to a later date.
This causes them to consistently spend less than they earn to create, ideally, monthly cash flow surpluses.
When such surpluses are aggregated and then channeled into savings, investments and businesses aimed at making more money, they become a form of capital.
So it is obvious that when we exercise self-discipline and underspend, and if we then also allocate our savings in attempts to make money with money, we are channeling our capital (from savings, which are shown in the asset column of our NWS) wisely. That should be easy to understand.
But what Guna reminded me of is that there is another potent source of capital: borrowings.
When we take on fresh liabilities to have more money available to make even more money, we are then channelling our capital (from borrowings, which are shown in the liability column of our NWS).
But doing so is riskier than using capital from personal savings because things can always go wrong in this dangerous, imperfect world of ours, as concert-goers in Manchester and pedestrians in London discovered not long ago.
For the rest of us, life goes on... And so the reason I am investing my time telling you all this here is to pay forward — in
a small way — the large intellectual debt
I owe people like Guna and other mentors for what they have sown into my life. It is
up to you to decide how to use this information.
Bottom line: You will need to decide if you want to keep learning new things to strengthen your capacity to use what you own and (carefully) use what you might be able to borrow to snowball your family’s future wealth by compounding your capital.
© 2017 Rajen Devadason
Read his free articles at www.FreeCoolArticles.com.