Many people operate under the false premise that money equals wealth. This is understandable since, in many respects, our society has become fixated on money and the things money can buy. However, I have come to understand that true wealth involves much more than money. True wealth, the ability to live a rich and satisfying life, is composed of three distinct types of capital: financial capital, human capital and social capital.
Money, money, money...
It doesn't take a lot of experience to know that a person can have plenty of money and still be very poor. You may have seen this in your own life or in the life of someone you know, but just in case you need convincing, I invite you to consider the curious case of Jack Whittaker.
For most of his life, Jack Whittaker was a lot like you and me. Hard-working and respected by his peers, Jack had a successful contracting business that provided employment to over 100 people. He married Jewell, his high school sweetheart, and together they built a comfortable life together. They owned a nice house in a nice neighborhood about 20 miles west of Charleston, West Virginia. Their granddaughter, Brandi Bragg, lived with them off and on while her mother, Jack and Jewell's only daughter, battled cancer.
Like I said, Jack Whittaker was a lot like you and me -- until Christmas 2002. That was when Jack won $315 million in the Powerball lottery and his life changed forever.
The Powerball lottery is played in 42 states, Washington, D.C., and the U.S. Virgin Islands. Players attempt to match 5 randomly drawn numbers. A player who matches the numbers plus the red "Powerball" wins the jackpot. According to the Powerball website, the odds of winning the jackpot are one in 195,249,054. To put this in perspective, you are 20 times more likely to be hit by lightning twice during your lifetime than you are to win the Powerball once. But Jack Whittaker did it. No wonder people said he was the luckiest man in the world.
For a while, Jack felt lucky. He celebrated his good fortune with a burst of religious zeal, giving $15 million to build two churches and starting a charitable foundation to help the needy. He said, "I want to be a good example. I want to make people proud of what happens with this winning. I want to promote goodwill and help people."
Yet despite his good intentions, Jack's life began slipping quickly out of control. Money and fame alienated Jack from most of his old friends. He started drinking heavily, staying out all night, and making the rounds at local bars and strip clubs. Lawsuits followed including two brought by women who claimed he assaulted them at a local casino. Later, telling his story to ABC News, Jack said, "I just got to the point that just couldn't tolerate what was happening to me anymore."
As bad as it was for Jack, it was worse for his granddaughter. Brandi was 15 when Jack won the lottery. You can still see her smiling shyly from the photographs taken at the time Jack was introduced to the world as the largest lottery winner in history. Her face beams with excitement and expectation. She's a cute girl and it is easy to see why Jack doted on her.
When he won, Jack told the press that he didn't need or even want the money, but he looked forward to Brandi being able to enjoy it. By all accounts, Jack made good on his intention. Brandi received a weekly allowance in excess of $2,000. Her almost bottomless bucket of cash became an almost bottomless bucket of trouble for her and those around her. The fast life appealed to her. Soon she was deep into drugs.
Her circle of friends changed frequently. Her money attracted some kids and repelled others. In September 2003 her boyfriend, Jesse Tribble, died of an overdose in Brandi's bedroom. Despite the suspicious circumstances and the pleadings of Jesse's father, no formal investigation into Jesse's death was ever pursued.
Then, on December 4, 2004 Brandi went missing. Her grandparents appeared on television to appeal for her safe return. Two weeks later her body was found wrapped in a plastic tarp and stashed under a junked van a few hundred feet from her new boyfriends home. State troopers identified the body by the tattoos on her neck. According to the medical examiner, Brandi died of an overdose of methadone and cocaine. She was buried on Christmas Eve 2004, almost two years to the day that Jack won the lottery.
Jack's heartache didn't end with Brandi's death. Six month's later, Jewell filed for divorce. She was tired of the disaster her life with Jack had become. She said, "I wish all of this never would have happened. I wish I would have torn the ticket up."
One might be tempted to say that Jack Whittaker was a special case and that most people with money are better off than those without. There is growing evidence, however, that this isn't necessarily so. In fact, several studies seem to indicate just the opposite.
For example, a study conducted by researchers at the University of Liege, Belgium, the University of British Columbia, Canada and University College London, England was recently published in the journal Psychological Science. The study titled "Money Giveth, Money Taketh Away: The Dual Effects of Money on Happiness," shows that money, instead of increasing enjoyment in life, may actually interfere with a person's ability to savor--that is, truly enjoy and appreciate--the day-to-day pleasures of life.
As part of the study, 351 adults were asked to answer a series of questions related to "savoring ability, happiness, the desire for future wealth, and current wealth." The answers were then correlated to the respondents' current wealth levels and desires for future wealth. Surprisingly, wealth and desires for wealth appeared to be associated with reduced savoring ability. This outcome led the authors to wonder if they could replicate the same phenomenon in a controlled laboratory setting.
In their experiment, 40 college students were invited to participate in a taste-test study involving chocolate. The students were divided into two groups, a test group and a control group. Members of the test group were given binders containing a brief preliminary questionnaire covering demographics, attitudes toward chocolate and some pages from a "unrelated study" showing pictures of money. Members of the control group were given identical binders and questionnaires, but their "unrelated study" materials contained "neutral pictures." After completing the preliminary questionnaire, participants were instructed to eat the chocolate and, when ready, to answer a set of follow-up questions.
The students did not know that the "unrelated" pictures were intended to prime their thoughts, a well-established protocol in psychological experiments. Nor did they know that they were each being watched surreptitiously by two independent observers. The observers, for their part, had no idea which participants were test subjects and which were control. They were simply told to record how long each participants took to eat the chocolate and to score them based on how much enjoyment they displayed. After controlling for differences between males and females (females almost always ate the chocolate more slowly and displayed more pleasure than the males) and baseline attitudes toward chocolate, those participants who had been primed with the picture of money ate the chocolate faster than the control group and showed less enjoyment in the process. Reflecting on their findings, the authors concluded:
The present research provides the first evidence that money interferes with people's ability to savor positive emotions and experiences....Taken together, our findings supply evidence for the provacative and intuitively appealing notion that having access to the best things in life may actually undermine the ability to reap enjoyment from life's small pleasures.
Another interesting study, published by the American Psychological Society in 2004, indicates that money is only one of many factors--and a relatively minor one--that determine a person's satisfaction in life. In this study, Ed Diener and Martin Seligman asked members of several distinct populations to indicate their level of agreement with the statement: "You are satisfied with your life" using a scale from 1 (complete disagreement) to 7 (complete agreement.) A score of 4 was considered neutral. Their results are presented in the following chart.
Itprobably doesn't surprise you that members of the Forbes list of the 400 Richest Americans scored highest in life satisfaction. It may not even surprise you that the Pennsylvania Amish also score very high. But personally, I find it remarkable that there is almost no difference between those two groups and the Maasai tribesmen of East Africa, who are, as Diener and Seligman point out, "a traditional herding people who have no electricity or running water, and [who] live in huts made from dung."
After reviewing these findings, Diener and Seligman state:
Many people feel that they would be happier if they had more income and additional material goods, and there is some mixed evidence to support this claim....But the effects of wealth are not large, and they are dwarfed by other influences, such as those of personality and social relationships.
If you are someone intent on building true wealth, Jack Whittaker's experience and the results of these studies may lead you to ask a very important question: If more money won't necessarily make one happier and, therefore (according to our definition) wealthier, then what will?
Three types of capital
True wealth is composed of three different, but essential, types of capital: financial capital, human capital and social capital. Financial capital is clearly important and, at a minimal level, essential. But above that minimal level, financial capital, no matter how great, can never compensate for deficiencies in human capital or social capital. Just ask Jack.
Human capital refers to the individual's development as a complete person. It is acquired through personal growth and training. Athletes acquire human capital as they build physical strength, agility and endurance. Artists increase their human capital as they learn techniques that allow them to express their insights into life and the world. Students accumulate human capital as they study and learn. You and I develop human capital as we strive to improve ourselves day-by-day. As we become wiser in our decision making, more self-reliant in our habits and lifestyle, and more firmly rooted spiritually and emotionally, we enjoy the fruits of deeper human capital reserves.
Social capital refers to a person's ability to relate constructively to the world around them. People rich in social capital are able to influence others in positive ways. Sometimes they are famous leaders like Abraham Lincoln or Winston Churchill or Gandhi, but more often they are quieter souls who inspire those around them to live better lives. Many of us have had parents or teachers or pastors who have played signficant mentoring roles in our lives. Such individuals bless others because of their rich stores of social capital.
The Wealth Triangle®
We can illustrate how these different types of capital contribute to true wealth using a diagram called the Wealth Triangle®.
The total area of the Wealth Triangle®, represents the amount of wealth that would be sufficient for a person to live the life they truly want to live. The degree to which a particular type of capital contributes to that sufficiency is indicated by the distance from the center of the triangle to the point of the triangle associated with that type of capital.
For example, consider a person who has a lot of financial capital, little human capital and almost no social capital--in other words, someone like Jack Whittaker. Jack's Wealth Triangle® might look something like the red shaded area below:
Despite Jack's immense financial capital, his true wealth is diminished by his relative lack of human and social capital. This mismatch between a person's financial capital and their true wealth can lead to extreme frustration and even self-destructive behavior. They may react by wishing their financial capital would go away (remember Jewell's comment?) or they may take steps that destroy their financial capital (think about Jack's irresponsible behavior.) Of course, neither course of action resolves the underlying problem.
The Wealth Triangle® provides insight into the course of action most likely to help that person build their true wealth and resolve their frustration. In the case of Jack Whittaker, we would suggest immediate remedial action to build his and his family members' personal and social capital.
The Wealth Triangle® can also help affluent parents think about how to help their children build their true wealth. How many trust babies have been ruined when they inherit large amounts of money for which they are not prepared? Parents who anticipate that their children will eventually receive a large inheritence would do well to focus on helping their children develop their human capital and social capital.
Applying the Wealth Triangle®
A simple three step exercise can help you apply the Wealth Triangle® in your personal financial planning.
STEP1 - REFLECT AND DEFINE.
The first step in the process is to define the life you aspire to live. If you haven't done this sort of thing before, you may find it difficult or even a little uncomfortable. You may be tempted to rush through this process, but take your time and and make notes to yourself as you ponder questions such as:
Is my life as rich and fulfilling as I want it to be?
What aspects of my life bring me the greatest joy?
What I doing when I feel most like the person I aspire to be?
STEP 2 - EVALUATE YOUR CURRENT WEALTH POSITION.
Assessing your current wealth position requires careful self-evaluation, but let's face it--most of us don't do that very well. To help get a more accurate assessment, you may want to do the second step with a spouse or trusted friend.
Take a sheet of paper and divide it into three parts labeled financial capital, human capitaland social capital. As you think about each type of capital in turn, make a list under each heading of assets you possess and the challenges you face.
For example, under human capital, you might note as assets things like your education, your career, and your ability as a public speaker. At the same time, your challenges might be thing like by poor physical fitness or lack of patience. After you have a fairly complete list for human capital, weigh your assets against your challenges while asking yourself the following question:
On a scale of 1 to 7, where 1 is "not at all" and 7 is "fully", how sufficient is my current level of human capital to the life I aspire to live?
Draw a Wealth Triangle®, as shown below, and plot your score on the human capital axis, then repeat the exercise for social capital and financial capital.
STEP 3 - CLARIFY AND STRATEGIZE.
With the groundwork you laid in the first two steps, you are now ready to ask yourself the central question of this entire exercise. Taking each type of capital in turn, ask yourself:
What will I need to accomplish in the next three years in order to feel happy with my progress?
For example, what will you need to accomplish in the next three years for you to feel happy with your progress in developing your human capital? Will you need further education? Will you need to get in shape physically? Will you need to develop further patience or the ability to express your appreciation for others?
How about your social capital? Are there relationships that need mending, professional networks that need developing, or community service that needs rendering?
In terms of your financial capital: Do you need additional savings? Do you need to pay down debt? Is your estate plan in place? Do you need a better means to transfer financial resources to children or grandchildren?
If you are careful in this exercise, the insights that flow from using the Wealth Triangle®, will guide you toward a greater understanding of what you must do in your particular situation to develop your true wealth. As you systematically follow the specific steps that flow from the planning process, your life will be more satisfying and you will have a greater sense of purpose.
Several academic studies and the sad experience of people like Jack Whittaker make it clear that true wealth is much more than money. True wealth, defined as the ability to live a rich and fulfilling life, is based on a balanced mix of three distinct types of capital: financial capital, human capital and social capital. When a person's life is deficient in one or more of these types of capital, that person's true wealth is diminished.
The Wealth Triangle® provides a planning framework that can help you understand what you need to do to build your true wealth. As you systematically implement your plans to increase your reserves of financial capital, human capital and social capital, your ability to live a rich and satisfying life will increase.