Personal Finance 101: What Is Social Capital?

Building Relationships and Gaining Social Capital

Almost immediately after yesterday’s post about frugality and personal value went up, a reader asked me a question via Twitter:

You wrote about “social capital” today. I’ve seen it a few times in other places but I don’t understand what it means.

personal finance 101Social capital is an interesting concept that at first glance may not have direct implications with personal finance, but time and time again, social capital can have an enormous positive (and negative) impact on our financial state. Let’s take a look.


Relationships with other people form the backbone of a surprising amount of personal finance success, from the job you want to the career path you dream of to the great deals you want to find. The relationships in our lives help us get our foot in the door time and time again.

My first job in college was given to me by a professor that I befriended while taking his class. Shortly after that, I requested that he become my academic advisor as well. A year later, he introduced me to a person on staff at the college, who I built a very long friendship with (one that still survives today, more than a decade later). That staff support person introduced me to another professor, who later arranged for me to get a very nice job straight out of college. Because of that job, I was able to meet several additional people, which directly led to my second post-college job.

Don’t get me wrong, I was qualified for each of those jobs. My ability to get them, however, had a strong leg up because of my established relationship with the parties involved with each job. In each case, the person I knew was either hiring or had a very close relationship with the person hiring.

Relationships are key. The more positive relationships you have with people, the more likely doors will open for you.

Building Relationships

Relationships, at their core, are exchanges of value. Your friends and associates give you information, deals, items, entertainment, and so forth, and you return the same.

I have one friend, for example, that is the go-to guy for home improvement advice. I have another friend that will come and help me in almost any pinch, no questions asked. I have a couple more friends who are always up for coming over, hanging out all evening, and playing games until dawn.

In each of those cases, there’s an exchange of value between the people in the relationship. I give my humor, my knowledge, my time, my connections, my skills, my compassion, and so on to others. In exchange, they give those things back to me.

Social Capital

The idea of social capital is simple. Social capital is built whenever you give in a relationship without expecting anything directly in return.

Let’s say, for example, that one of the community groups I’m involved with wants to have a banquet, but no one is willing to step up and organize. I raise my hand and say, “I’ll do it,” then I coordinate everything on my own. This earns me a bit of social capital within the club.

Alternately, if a friend’s computer is fried and I spend a couple hours at his house disassembling it, replacing the motherboard, and getting things back up and running, I earn a bit of social capital with him.

If a friend of mine needs a job and I’m able to call someone up and help that person get a job, I earn a bit more social capital.

When you’re kind to people, listen to their problems, and are supportive, you earn a bit of social capital.

What good is it?

Social capital earns dividends.

If you have a lot of social capital, people will recognize you on the street and greet you. They’ll tell others positive things about you when you’re not around. These (among many other things) are the dividends earned by a solid supply of social capital.

Social capital can be spent.

If you’ve spent a lot of time helping others and then you need help, you can cash in some of that social capital and ask for help. Your efforts in building up that social capital will pay off when the support comes through.

Social capital can be reinvested.

If someone calls you up and offers you something of use to you (because of the social capital you already have), you can take it (spending some of yours) and pass on that offer to someone else (building up some more).

Building Social Capital

The best way to build social capital is to help others without expecting anything in return. Help people you know. Volunteer for the tough tasks. Be there for your friends and family.

Do it consistently and you’ll begin to build up social capital. People will think – and talk – differently about you. You’ll slowly find more and more good things coming your way.

Yes, sometimes, people take and take and don’t seem to give in return. If you think you’re surrounded by people like that, it might be true – or it just might be that you never cash in the capital you have. Ask for some things.

If you find people who won’t help you after you’ve given them a lot of help, those are the people to avoid – and over the long run, they’ll be avoided by quite a lot of people.

Good luck!

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