Your human capital is critical to your overall success in building financial wealth and achieving life goals. Effectively managing one’s human capital is a key component to avoiding a retirement gap later in your life. What is human capital? We define human capital as your talents, skills, education and experience. Unless you have inherited your money or won the lottery, it is your human capital that drives your income and allows you to build your financial assets. You earn a salary, a bonus, and perhaps earn equity in your company by deploying your human capital.
So YOU are an asset, and one that is critically important to your overall success. In fact, if you are in your 20s or early 30s, the present value of your human capital could be millions of dollars. This likely far outpaces your financial assets early in your adult life. As you age and have fewer years to work, the present value of your human capital decreases. So while your human capital value decreases, if you follow a savings and investment plan, you have hopefully increased your financial assets.
At Age 30: the present value of your human capital is roughly 85% of your net worth
At Age 55: the present value of your human capital is roughly 40% of your net worth
While much time is spent with advisors on the financial components of one’s life, it is equally important to focus on your human capital. It is your human capital asset that drives your financial asset accumulation. At minimum, to address both your human and financial capital you should have:
1) A long-term financial plan that incorporates your goals and your actions.
2) A five-year career plan – who do you (and/or your spouse) want to be in five years and what actions are you taking to get there – what skills and experience are you acquiring?
3) An annual spending plan – in addition to income, make sure you also have a plan for the expense side of your personal life.
4) Protection of your human capital – for example, do you have disability or life insurance in case you (or your spouse) can no longer use your human capital to generate income?
5) Business executives are working longer, a trend that started a decade before the recession. According to the Bureau of Labor Statistics, in 1998 over 12% of people aged 60-64 retired within the next year. In 2009, this dropped to less than 7%. For those aged 55-59, 4% retired in 1999, while only 2 % retired in 2010. The number of people older than 55 who are working has risen by 3.1 million since the recession. Because you are likely to work longer, shouldn’t you manage your human capital more proactively along the way?
Take the mindset that YOU are one of your most valuable assets and plan and act accordingly – it can make a HUGE difference in your ability to achieve all the goals you have for yourself and your loved ones!