This is Part 1 of a 2 part series on the topic Human Capital.
In financial planning, we focus on financial capital, which is basically money. This includes your investments, how much you save, how much you spend, the growth within your investment accounts, withdrawals during retirement, and many other factors.
Another important concept is called human capital. Human capital is your ability to earn income over your lifetime. This is an enormous asset, and it is much more within your control than the performance of your stocks, bonds, or real estate investments. Human capital encompasses your education, the career you select, job changes during your lifetime, and your earned income. It also includes part-time work during retirement, which may result from needing extra income or from choosing to work for enjoyment. Financial advisor Paula Hogan describes human capital as “what you do with your skills and talents and how society chooses to pay you for your endeavors.”
Human capital is a major determinant of an individual’s lifetime standard of living. Rather than focusing only on investment accounts (and the money that has been saved and invested), the focus shifts to the income stream resulting from our careers. A steady income stream allows for consistent savings over the years, which can lead to a larger investment portfolio and financial security.
Human capital emphasizes the importance of deciding the type of education you want to pursue, how much education you want to obtain, and what career path you choose. A college degree is considered the clearest path to the American middle class, and it can significantly increase a person’s earning power. Unfortunately, a college degree is no longer a guarantee to a good job. Careful thought needs to be applied to matching your skills and talents (what you love to do) with a career path that can pay you what you want to earn.
Nurturing and managing your human capital is essential throughout your career. Note, however, that managing your human capital is not the same as saying, “Maximize your income.” Consider a person who loves teaching grade school children. Most likely, being a teacher is not going to provide a high income. Yet a person who loves teaching can design his or her lifestyle around the income that a teaching career provides. Furthermore, teaching positions often provide a defined benefit pension after retirement. If a teacher works for the same employer for many years, the pension can be very rich indeed.
The next blog entry (Human Capital, Part 2) provides a story of someone who maximized their human capital, resulting in a rich retirement.
