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.

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.


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.