Aug 082012
 

Skilled and outgoing individuals are what companies look for when they hire. They don’t care about how rich or financially successful an interviewee is. They’re called the “human” resources department because they’re responsible for recruiting the best ‘human’ capital. In part 1, I wrote about what that means, today will be about why it’s useful.

By properly maintaining our human capital and keeping our professional skills adequate we can ask for fair wages regardless of how inflated our currency becomes. This is because if our human capital is still valuable relative to the rest of the market then the services that we offer must also become more expensive to pay for.  As long as we keep improving our skills we should be able to keep up with the cost of living in our respective fields.

Even though I believe in general that human capital is our most valuable asset, it isn’t always the case. It’s valuable when we’re young because even a teenager, who doesn’t have any financial capital, can utilize her human capital to babysit and readily make some income. However when she retires at the age of 65 then her human capital and financial capital switch roles. Seniors are expected to have a paid off home, social security, and a decent pension or investment nest egg. But their human capital isn’t worth much anymore because seniors simply can’t work as efficiently as they used to.

This is why it’s important to save and invest during our working years. Eventually we won’t have the capacity anymore with our human capital to pay the bills. When that time comes, which is inevitable for everyone, we better have enough financial capital such as rental properties, or dividends, to offset our declining working potential so we can still have a dignified retirement (^_~)

One last thing I’d like to highlight. We all have a financial plan. But a lot of people mistakenly ignore human capital when making their plan. If a financial advisor says he can help us create a complete financial plan based on just our tangeable variables like salary, age, risk tolerance, and when we want to retire, then that’s not entirely true. Someone may think he should invest 60% in stocks, and 40% in fixed income (like bonds) based on his current financial situation. But once we include human capital into the equation we may learn that he’s a university professor. He will retire and receive a defined benefit pension (fixed pension) which is adjusted every year to the cost of living. Since this will already represent a generous amount of fixed income in his retirement years (which he didn’t account for before) he may now want to be a little more aggressive with his asset allocation for his personal investments.

The age rule for calculating how much fixed-income vs equity you should have.

Human capital can give us a more complete picture of what our financial plan ought to look like. That’s why we have to learn about and get to know our own capacity for human capital, because a big part of financial planning has to do with personal worth, and no financial planner in the world can know our own potential better than ourselves.

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Random Useless Fact: Talent doesn’t always improve our human capital. There are many useless skills out there, like the one below, which probably won’t help you increase your income.

 

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Kim@EyesonthedollarTB at bluecollarworkmanSteve@The Loonie BinRobLiquid Independence Recent comment authors
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Modest Money
Guest

Sounds like I need to get working on my human capital asap. I’ve been tempted to switch careers and the thought of a pension in other fields is appealing. Apparently you just shot down my dream of getting a career in reading text backwards. By the way, when’s the tennis rematch?

Liquid
Admin

Haha, sorry to burst your bubble :p. I’m not busy next week so whenever. I won’t hold back next time >_<

Rob
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Rob

You can instantly tell a blog done by a millennial, awesome cool graphics, us boring old baby boomers get excited by a cool spreadsheet or two :).

Graphics aside that was an interesting post.

Liquid
Admin

I get excited by spread sheets too. I’m a visual type of person so I usually understand graphs and charts faster than reading a description of the same thing.

Steve@The Loonie Bin
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Steve@The Loonie Bin

I totally agree! That’s why I try and through in charts as much as I can. Excel is so handy for charts AND keeping track of dividends!

Liquid
Admin

Congrats on your own July dividends, over $500, nice. I wonder which one of us will get to $600 in one month first. No pressure :p

TB at bluecollarworkman
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Damn. Becuase I did really good at reading that backwards! THought maybe there was a backwards reading career that I didn’t know about. 🙂

I never really thought about human vs financial capital and how they switch over our lifetimes. I like how the age on that graph is undefined exactly because that’ll be different for everyone.

Kim@Eyesonthedollar
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That’s a good way to look at it. Your potential is worth more as you start your career then it switches. I still feel like my human capital is pretty high, but I am certainly starting to lean in the other direction.