Staying Afloat: Financial Capital

Last week I wrote about personal and family resilience and outlined ten different types of capital. I defined capital loosely as a useful resource that you have some control over in order to comfortably get you through increasingly uncertain times. The first one of those—which also happens to be the one that most people associate the term capital with—is financial capital. Yes, we're talking about money derived wealth. I'm not going to cover this in any great depth—it is, after all, a blog post—as it is such a huge topic. Instead, see this as a prod for further contemplation, or maybe just as a reminder.


Rich man, poor man

It is commonly accepted that if you have a large enough pile of cash, you'll not only be able to secure your future, but you'll be happy too. We are told that having a high income and stash of other easily converted quasi-financial assets, such as stocks, shares, Bitcoins and a gold-plated pension will make you deliriously happy. However, this is not so. The best way to disavow yourself of this illusion is to stand during rush hour at a commuter station in the heart of London's City district or Wall Street in New York, and observe your fellow human beings as they swarm past. Not only do they not look happy, many of them look downright stressed and angry as they scurry back to their multi million dollar apartments and country mansions. Frankly, some of these stuffed suits look like they are about to burst a blood vessel.

But these are merely the working wealthy. What about people who have already accrued wealth beyond their wildest dreams? To see how well these are doing one only has to open a newspaper or read a biography or two. The former are filled with lurid stories of celebrities, lottery winners and sports stars ruining their lives with cash-fuelled hedonistic behaviour, and in the latter, you will often read of egotistical self-sacrifice, power struggles, lifetime-long legal battles with detractors and an eventual sad and lonely death followed by a drawn-out family squabble as lawyers pick over the will like vultures on a carcass.

Personally this kind of fate doesn't appeal too much to me.

So, if having too much wealth can be a curse, does it follow that having very little wealth will make you happy? Well, of course not. Unless you are Mark Boyle (the 'Moneyless Man') you're going to need to have access to some cash in order to survive, and for most people that means having a job. Now, having a job, in itself, might not make you happy, but at least it allows you to access a flow of money which you will need to get through life. Periodically, however, you may find yourself without the means of making money flow into your pocket, meaning you will suddenly find yourself with no money at all.

Having no money, or not enough to live off, is neither pleasant nor resilience building. If you find yourself in the position where you do not have enough money to support yourself or your family then you will immediately find yourself cannibalising your other forms of capital. You may be forced to sell off valuable items, such as your car. If you sell your car then you may find your scope for travelling to and from work is diminished, making it harder still to find a replacement job. This is the kind of negative feedback loop that is put into effect by a personal financial crisis. Next, you may raid your savings if you have any, just to buy the basic necessities. Perhaps you will similarly turn to credit cards or other form of predatory lending simply to put food on the table and pay the bills.

As time goes by and your situation has not improved you will be increasingly stressed and worried. When you get stressed your body and mind put themselves into an elevated threat mode. And as they don't know the nature of the threat, they prepare for every eventuality, which is why being stressed is so draining. Because of this your health capital will suffer. You may lose your appetite, you won't be able to sleep properly, and any addictions you have may spiral out of control. You may even develop new addictions — such as sleeping pills or prescribed opiates — as you desperately try to stop the stress from draining your life force. Eventually, if this continues, you may end up falling out with your partner, getting thrown out of your home and end up staring into the abyss thinking "What happened?"

Once the financial rug has been pulled out from beneath your feet a system of negative feedback loops will rapidly assert itself and trying to get back on your feet can feel like attempting to haul yourself out onto dry land from the set of rapids you've just fallen into. It is really quite a terrifying situation to be in, and one that is best avoided at all costs (as I can personally testify).

Yet this, unfortunately, is the scenario that more and more people are facing as our economies become increasingly threadbare. Today's economic reality is that more and more wealth is concentrated at the top rather than distributed more equitably, and at the same time the apparatus and mighty institutions of health, social security and state-backed pension provision that were put into place during an era of great prosperity during the second half of the 20th century are staring at bankruptcy.

Given these realities, any rational person would not want to be placed at either end of the financial wealth spectrum, and would instead opt for a happy medium. And given that not too many of us are likely to find ourselves accidentally falling into the most wealthy 1%, we only have to worry about being relegated to the status of financial non-entity class. Once you are relegated to this economic sub-class, where the best job you can hope to find is a zero hours contract on minimum wage, and any downward adjustment in your government allocated wage support will have a cataclysmic effect of you and your family, you are going to find it almost impossible to pull yourself out of it again. And given that this sub-class is rapidly swelling in size across the industrialised world and gobbling up people as if Godzilla and his extended family were at an all-you-can-eat buffet, what can you really do to avoid being a victim?

Control

Chaos and stress occur when you are not in control. To get control of your financial capital you first need to do an appraisal. If you're familiar with using spreadsheets then great, but a piece of paper and a pencil will also suffice. Make a note of all your income and all your outgoings on a monthly basis. If you don't know some of the figures then make a realistic estimate but brutal honesty with oneself is required in this exercise. Do the calculations to account for a few months, or even a year.

What is revealed? Do you spend more than you earn, or do you have a nice sum left over each month? If it's the former then you are going to have to find ways to either cut your outgoings or increase your income. Obviously, some of your costs will be fixed, but perhaps they can be reduced? It pays to think carefully abut what you are paying for both your fixed costs and your variable ones, and make actionable changes accordingly. There are many, many ways in which you can reduce your variable costs—and there are many websites and books out there packed with tips—so I'll just mention a few to get the thought processes rolling although, of course, everyones' circumstances are different. You could, for example:

- Cancel any entertainment packages you are signed up to and do something less passive instead
- Buy ingredients in bulk and make large pots of food, freezing individual portions for later eating
- Search around for cheaper utility deals and try to cut your energy and water usage
- Swap your car for a bicycle, or at least go by bike more often
- Forego a vacation rental and instead do a house swap

On the income side of the scale you could, for example:

- Take on an extra part time job
- Make art or crafts and sell them online
- Make value added products from your garden, such as chutneys or marmalade, and sell them at farmers markets
- Get a higher paying job
- Rent out a room in your house

The object of the game is always to live below your means. If you are able to  live below your means you can use the excess money to invest in other forms of capital and increase your resilience. You could, for example, spend your spare money on buying fruit trees (bio capital), cooking a huge feast and inviting your neighbours round to eat it (social capital), picking up some quality hand tools from eBay (hard capital) — or you could store it as cash savings, thus increasing your emergency fund (keeping it in the realm of financial capital). Thus by becoming more frugal you can become richer in a more rounded sense.

Speaking of this, one of the first things you will need to do to build financial capital resilience once you have got your income and outgoings tuned, is to build up a savings fund. There are shocking figures circulating that almost 7 out of 10 adults in America cannot put their hands on $500 to cover an unexpected emergency. I'm sure the figures will be similar for Britain and other first world nations, especially if anecdotal evidence is anything to go by. The fact is that most people are living wage slip to wage slip, or from one government handout to the next. Your immediate aim should be to ensure you are not one of them. A good target to aim at would be to have enough cash saved up to cover six months of expenditures for you and your dependents. Of course, this is just a target—any money at all that you can put aside will make you just that bit more resilient in the financial stakes. If six months seems somewhat extreme and unattainable, start with one month.

And when I say cash, I mean actual notes that you can put in your pocket. Any money that you have stored in a bank account is not technically yours at all, but the bank's. As all banks operate on a fractional reserve basis (that is, they only have something like 1/10 of the money that is on their balance sheet at any one time, the rest being all manner of convoluted investments, derivatives and loans), they will not be able to give it back to you if sufficient numbers of other people also ask for theirs back at the same time. This is called a bank run, and legislation is already here in Europe to protect banks against this happening by limiting the amount of liability they have with regard to your savings.

It is important to consider financial capital first because, with the exception of every other form of capital (except perhaps health), a financial disaster has the ability to bring down your carefully constructed house of cards. To that end we should first consider ...

Debt

We are riding high on the biggest debt bubble in history. This should terrify most people, and yet it rarely gets a mention. In fact, many younger people—including some economists—who have grown up in this debt bubble simply see it as 'normal' and assume it will continue to inflate forever. History tells us otherwise.

The fastest growing form of debt in the UK is consumer debt. We are bombarded with enticements to buy new stuff, to upgrade cars and phones and to splash out on holidays and computer games and a million other things.

But debt, in actual fact, must be repaid, otherwise it would never be lent in the first place. And so you must ask yourself before you take on any debt whether it is likely to increase your resilience or not. Not all debt is bad, just as not all savings are good, but think very carefully about taking on debt and always try to avoid it if you can. Because taking on a debt means handing over a portion of your future security to a faceless entity that does not care about you or your wellbeing: all it cares about is getting its money back, with interest.

At the very least, you should never take on debt to purchase consumer products or services. I know it's easy to be tempted, and we all have our weaknesses, but consumer debt can be an Achilles heel for many. Whenever I forget this simple fact I sit down and watch one of the many popular debt-collection TV shows and imagine it's my front door that the dull-eyed jobsworth debt collectors are kicking down at dawn, and my family they are forcing out onto the street. Because being in debt and finding you are unable to make payments is a sure fire way to set you on the road to financial oblivion.

So, if you have much unsecured debt, make it a priority to reduce and eliminate it. If you have a large amount of "secure" debt (in quotes because no debt is secure, from your point of view), such as a mortgage, also consider how you might reduce that, perhaps by moving to a smaller or cheaper property, or making increased monthly payments. The less debt you have, the less you'll have to worry about if/when there is a prolonged economic seizure.

Stocks and bonds

Known as 'paper wealth' stocks and bonds are certificates that purport to represent the value of a company or government or other real-world entity. Their price is determined by both the yield that they pay out (i.e. a sum of money paid periodically to the owner of the certificate) and the market's take on its true value based on its riskiness. Shares, generally, tend to be riskier than bonds, as bonds are underwritten by the central banks of national governments and are therefore deemed "safe".

But remember, no form of investment is "safe". Like other forms of paper wealth (futures, derivatives, hedge funds etc), stocks, shares and bonds are only an abstract representation of an underlying reality in the physical world, and their value can plummet to zero overnight. In fact, with the advent of high-speed computer trading, their value can plummet to zero in nanoseconds.

At present, stock markets around the world seem to be rising inexorably. The main reason for this is the huge amounts of financial stimulus being pumped into financial markets in the wake of the last crisis ten years ago. We are long overdue for a massive correction in this regard.

Gold and precious metals

It's common to see articles about financial planning and resilience end up by recommending readers buy gold as a means of securing their wealth (with a handy link to the author's favourite bullion merchant). I'm not going to do that. I don't believe that buying gold will do you an awful lot of good, unless you are extremely wealthy and really cannot sleep at night without thinking your future security is stored in a lump of yellow metal in a Swiss vault. The reason I don't believe that buying gold bars is a good idea is several-fold.

Firstly, they are eminently worthless unless you are able to liquidate their value in a safe manner. Given that gold is a safe haven, it has a consistently high value. It's very stealable. Should a financial collapse occur and word gets out that you have some gold buried somewhere then it's just a matter of time before you and your family receive a night visit from a group of gentlemen carrying duct tape, cable wire and garden secateurs. This exact scenario was very common in Argentina following their financial crisis in 1998. And given that it's impossible to sell physical gold without telling someone that you own it, there's no way around this scenario. If you own it, you take this risk of someone else finding out you own it, and wanting it.

Secondly, gold is useless. Okay, so it has a few minor uses, such as tooth fillings and fountain pen nibs, but beyond that it has little immediate use. If you really must own some precious metal then silver might be a better bet as it has a host of industrial and non-industrial uses, meaning it will always likely retain some value based on this. And it is less likely to get you in trouble.

And thirdly, gold mining is one of the most environmentally damaging things mankind has ever devised. I'm amazed at the sheer number of articles out there which spend several paragraphs outlining why we need to look after Mamma Gaia, and then go onto recommend buying gold to hedge the future.

Are there any situations where it might be a good idea to hold gold? Sure. Buying a few coins, for example, or holding onto family jewellery or gold ornaments will give you a bit of psychological and financial security without making you such a target. Generally speaking, however, a far better investment would be in hard goods and land. These are the kinds of things that will keep you alive in a prolonged state of emergency in ways that a lump of metal cannot.

Cryptocurrencies

A recent alternative to holding gold or cash, and something that everyone is talking about at the moment, is cryptocurrencies such as Bitcoin. I'll be honest and say that I don't know enough about them to have a fully informed opinion here. When they first appeared my first instinct was "snake oil" — and this has been bolstered by all the overblown claims I have seen lately, usually made by baby-faced millennials who have very little conception of the wider systems in which they operate.

My second thought was that they will clearly be unviable as energy constraints assert themselves — after all, if you have no access to your "wallet" on a smartphone or computer, then you have no access to your money. And then theres the huge amount of energy used by computers to "mine" the data that allows each unit to claim its uniqueness ...

However, several clever people whom I trust and respect have said they see some potential in cryptocurrencies and blockchain technologies as a form of decentralised cash, so I shall research more and develop a more informed view over time.

Anyway, that wraps up this short summary of financial capital as it relates to personal resilience. Next week I'll talk a little about a non-abstract form of capital — hard goods.

I'll end with what I consider to be the seven most important points to consider when building up your financial capital resilience:

1) Live within your means and invest any surplus in other forms of capital
2) Get out of debt as soon as you can — especially if it is non-productive debt
3) Build up an emergency cash fund to last you a good few months
4) Don't rely on paper wealth being a good store of value
5) Don't be a goldbug
6) Don't think you are going to receive much of a pension
7) Don't invest in cryptocurrencies unless you are 100% sure you understand them (nobody 100% understands them ...)

Holistic Resilience

I’ve been thinking about resilience lately, and what that word means to people. According to my Concise Oxford Dictionary, the word resilient is defined as:

1. (of an object) Able to recoil or spring back into shape after bending, stretching or compressing 2. (of a person or animal) able to withstand or recover quickly from difficult conditions.

As our supply of cheap, concentrated fossil fuels stutters and dwindles, and the industrial age that has ridden on its back for so long enters its twilight years, it is a certainly that most of us will find ourselves experiencing great change. Despite all the bluster and inflated claims of a new ‘green’ era in which people will be able to continue their high consumption lifestyles and enjoy all the benefits accorded by globalised supply chains, the facts — as I’ve been researching and writing about for the past eight years — simply don’t stand up to any meaningful analysis of this possibility.

A minority of critically thinking people have accepted this and recognised the likelihood that their lives are going to take a turn for the materially poorer in the immediate future. A smaller minority still have decided to actually take action in preparation for this. These people have seen that all is not well in the three major ‘E’ realms of energy, environment and economy, and are concerned about what it means for them and their families. They may hold differing opinions on what the trigger point will be — ranging from economic collapse and global war, to rampant virus outbreaks and civil strife — but they share the same feeling that things are more delicate than the mainstream media would have them believe, and that the best way of ensuring one’s welfare is to prepare for an era of disruption and dramatic change.

These people can count themselves as among the lucky few, because preparation and proactive behaviour is always better than unpreparedness and reactive behaviour. Once they have got over the psychic shock that usually accompanies a realisation of an uncomfortable truth, and then proceeded through the standard stages of the Kübler-Ross Change Curve (also known as the Five Stages of Grief Model), they will find themselves at the ‘acceptance’ or ‘integration’ end of the process. This is the point where they decide to do something useful about the predicament they find themselves in.

Not everyone, however, makes it as far as the acceptance stage. Many get caught up in the ‘frustration’ and the ‘depression’ stage of the process, and find they cannot escape. These people see little or no point in continuing, and often they adopt a nihilistic outlook as a coping mechanism. It is as if they are being pulled into a black hole. And yet if they can pull themselves away from the gravitational well of despair and make a commitment to moving forwards to acceptance then they can be said to be demonstrating resilience. Resilience, in this case, is a dogged determination to make the best of the scenario you find yourself in, despite the fact that you have no control over the wider situation.  It is the conscious decision to take control and do something useful.

“Something useful” is often manifested in the form of stockpiling food and other items that will be valuable to have around if they are suddenly no longer available. This is a natural and worthy start, but it is only the beginning of a much wider transformation on the path to resilience. Now that the internal reality model you were brought up with has fractured and is no longer useful, you may begin to frantically hunt for new information and make connection with like-minded people who have been through the same transformative process as yourself.

Plenty has been written on the subject of resilience in the past, and the focus is usually on the preservation of one or more forms of capital. This may be because people are generally, and understandably, concerned with losing what they already have. This has led to a lot of talk about how to secure one’s financial capital (wealth) and property. Ranked higher still is how to preserve one’s corporeal presence on the planet i.e. how to stay alive if the food trucks stop turning up at your local supermarket. In other words, resilience has come to mean protecting and holding onto ones capital.

But capital is an oft-misunderstood word, usually meant only to mean material assets or the means with which to produce wealth — hence its association with capitalism. But the concept of capital goes far wider when considered in the personal sense. Everybody — no matter how materially poor they are — has various forms of personal capital. It could be considered the summation of the resources that we value and have some form of control over. Logic then tells us that if we want to be happy (and who doesn’t?) we should build up our capital.

Having personal capital that we can use to our benefit and control can be translated as empowerment. Being lost in the ‘depression’ stage of the Kübler-Ross Change Curve is a failure to recognise one’s personal capital twinned with a self-defeating outlook that says “there is no way out of here – I should give up now.” This is not a recipe for happiness and empowerment, so the first step to figuring out how to become resilient is identifying our capital in order to build upon it. These are the broad forms of personal capital to recognise and identify in your own life:

1. Financial capital. Let’s start off with the simplest and most easily recognisable one. Your wealth includes all the money you have in your bank account or stuffed in your mattress. It includes any assets that can be easily liquidated (i.e. sold off), such as a house or car, as well as share certificates, gold bars and antiques hidden in your attic. When considering wealth, you must deduct debts. In our modern world, many people look wealthy, but often they are very highly leveraged and have a negative net worth. As Mark Twain once quipped on becoming wealthy “I wasn’t worth a cent two years ago, and now I owe two million dollars.”

2. Hard capital. This is the stuff that you own. It includes everything that is in some way useful. Books, lawnmowers, furniture, fishing rods, guitars and that drawer of old nails and bolts in the basement. It could also include articles that are beautiful, but otherwise useless — as long as it adds value to your life in some way it can be considered part of your capital. If it isn’t useful or beautiful and it has no monetary value you should probably get rid of it.

3. Mental capital. Your mental capital includes everything that you use your brain for. We’re talking knowledge and education (specifically, education that is useful in some way), language skills, other skills (cooking, fishing, sewing etc.), musical abilities, all the books you have stored in your head and a sense of humour. Yes – all of these are assets that are at your disposal to help ease your way through life and make it productive and enjoyable. Mental capital could also include mental health capital and — crucially — your outlook on life.

4. Social capital. No man is an island, they say, and your family and friends are of potentially immeasurable value to you. There are zero instances in history of successful societies comprised of individual loners, so it’s a good bet to build up your network of trustworthy and sympathetic people who will accompany you into whatever the future holds. Do you invest time in your relatives and children? Are you the kind of approachable person people turn to for help? Do others see value in having you around? This holds too for any groups you are a member of.

5. Health capital. Your body is the most important asset you own. Without it you are literally dead, and so it makes sense to look after it. Good nutrition, exercise and an avoidance of harmful addictions mean that your reliance on the failing industrial healthcare system will likely be minimised. What’s more, having a healthy body means you will enjoy life more and can undertake a wider range of types of work, which leads to …

6. Employment capital. What do you do for a living? Do you enjoy your job or are you merely doing it to keep afloat, even though you dislike it? How many marketable skills do you possess? Do you have more than one way of making money and multiple income streams, or are you so specialised that if your job vanished you would have no way of supporting yourself? Admittedly hard to quantify, these are some of the questions to ask when considering the kind of work you do, how it benefits you (and the wider community), and how resilient to shocks it is.

7. Bio-capital. This is the environment you live in. If you are a millionaire living in a polluted inner city with no trees or plants then your bio-capital will arguably be lower than a penniless hermit living in a wilderness zone in the mountains. Interactions with the living natural world are crucial for human wellbeing, and the fact that so many people now have very little contact with wild animals and plants is not just a sad reflection of modern life but also a threat to the sustainability of our ecosystems. As organisms, we humans depend entirely upon the natural capital provided for free by Mother Earth. Treating ecosystems recklessly and exploiting them for short-term gain is like sawing off the branch we are sitting on.

In terms of personal bio-capital, think about what you have access to or control over. Do you own a garden that could be planted up with insect friendly plants, fruit trees and organic vegetables? Maybe you don’t, and all you have are a couple of window boxes and some shelf space. This is still bio-capital — you can grow a few small plants such as tomatoes or chillies, and you can sprout beans and pulses on the shelves. Maybe you don’t even have that, and yet you can still be a guerrilla gardener or grafter (planting and grafting in communal spaces), or you could help out at a local nature reserve or organic farm, clean litter from the beach or canal you live next to … the possibilities are many.

8. Time capital. How much time do you have? A lot? A little? Many people these days are afflicted with a disease called busy-ness. They are always busy and have no time for anything! When you haven’t seen them for a while and you ask them what they have been doing they invariable respond that they have been “oh, you know, busy!” So consider how much time you have available to you. How can you make better use of the time given to you? Time, we know, is subjective: it can speed up or slow down depending on who is experiencing it and when. You can ‘time hack’ your life using methods such as meditation and contemplation, and you can strip things out of your life that are unnecessary and time-consuming.  Furthermore you can become efficient at planning and executing tasks so that you have time spare to do enjoyable things. Balance is key.

9. Emotional capital. How much control do you have over your emotions? Do they control you or is it the other way around? Do you live a fearful life full of angst and worry, or do you adopt a contemplative or Stoic approach to existence? To some extent we are not able to control the emotions we are born with, but we do have a choice in how we respond to external events. Gaining a solid bedrock of emotional security is a crucial form of capital that is often overlooked.

10. Spiritual capital. Finally, we have spiritual capital. By this we mean how we relate as individuals to the wider cosmos.  Since the Enlightenment, people brought up in the Western world have been taught that they are inconsequential cogs in a vast machine called the Universe. There is no meaning in life, they say, and the whole of existence is an interstellar game of billiard balls played with atoms. Needless to say, this bleak outlook represents a break not just with tradition, but also with every other human society that has ever existed. People, they say, are merely meat sacks of DNA, programmed like robots and only self-interested. Love is a chemical reaction that will one day be produced in a test tube, and consciousness is merely data on an organic chip stored in your head.

Thankfully, more people are beginning to question this view. At the same time they are turning away from the major religions — which have claimed hegemonic control over the spiritual dimension for millennia — and are awakening to the personal spark of potential within themselves. A good spiritual grounding is an empowering phenomenon, and therefore a very valuable form of capital.

Each of these ten forms of capital are present to a greater or lesser extent in everyone’s lives. They do not exist independently from one another, and they will usually grow in symbiosis with one another, as long as no single one becomes outsized compared to the others.

Combining these ten form of personal capital are what I am going to be writing about over the coming months. It’s a process I’m calling holistic resilience i.e. considering ways in which to withstand or recover from difficult situations using a synthesis of personal capital. I’m looking forward to expanding on each of these ten forms, as well as delving deeper into the meaning of resilience and why people should be developing it. Along the way I hope to include many examples and introduce new concepts from different areas of thought.

Three key assumptions throughout will be that:

1 – The industrial age is coming to a messy end due to diminishing energy returns

2 – We have free will and are willing to use it

3 – There are no guaranteed outcomes in life