Jul 262012

Calculating our net worth requires us to know the value of all our assets. But ironically our most valuable asset is always left out when determining our real wealth. I have a special type of asset which is worth even more than my apartment. But the problem is I can’t add it into my net worth statement (O_o) That’s because I’m talking about the intangible asset called human capital.

Our Human Capital is basically the present value of all our future earnings.  If you are working at a dead end job making minimum wage then unfortunately your human capital isn’t worth very much. But if you’re a doctor and have the skills to save lives then you have an incredible amount of human capital. Understanding this concept is essential to creating a holistic financial plan for ourselves.

Increasing our ability to earn more money for the future, like getting hands-on work experience or completing a degree, is considered investing in our human capital. The more capable we are as a person, the more valuable our human capital becomes. Entrepreneurs and CEOs naturally have an amazing amount of human capital. Mark Zuckerberg, the creator of Facebook for example, can still live a pretty rich life even if he lost all his money today. He could file for bankruptcy and his net worth could be worth zero on paper, but no big deal. Mr. Zuckerberg can easily start working on a new project and get massive funding from investors due to his experience and past success. Even if he decides to just become a common engineer in some generic tech company he could easily make more money than most people do, because who doesn’t want to hire the Facebook guy!? His human capital alone is enough to sustain an upper-middle class lifestyle.

Everyone is born with human capital but not everyone is worth the same. Just like investing in financial capital, like stocks, to make it grow, we must also nurture and invest in our human capital if we want to it to grow too. Once we understand that financial capital (like our investments) and human capital (like our work experience) are really just two sides of the same coin (which is our overall economic well being,) then we can find our own balance between the two.

Someone who just graduated with an MBA and $100,000 of student debt may actually be in a wealthier economic situation than someone else who just received $100,000 inheritance but have never completed highschool. The first person has the tools to properly manage their debt, earn a high income, and invest their savings prudently. The second individual knows nothing about money, and could easily spend the entire windfall on frivolous things. From a net worth point of view, the second person with the inheritance is $200,000 ahead of the first guy. But if we consider the intangible assets then the first person is definitively better off. That’s the power of human capital. It’s potential is limitless 😀 So no need to be jealous next time you see someone with a bigger net worth than you. Their true worth is in their character, intellect, ability to save, experience, and all those other immeasurable traits that make up their Human Capital.

Continue reading Part 2 here.