Most people are wealthier than they think. Traditionally, people add up all their assets (i.e. cash, stocks, bonds, retirement accounts, real estate) and subtract their debt to get their net worth. That number often seems too small and truly is when people forget to add the value of themselves. What is the value of your future paychecks, or income stream? That number is your “human capital”. In other words, it is your ability to work, get a bonus, get overtime. Financial planning experts say that this is a key asset when looking at your personal balance sheet.
As people get older, their financial assets become an increasing part of their balance sheets and their human capital decreases. This is because, as you get older, you have less working years ahead of you. As any financial asset in your portfolio, your human capital should be protected and managed.
Even though human capital is a large asset, especially with younger people, it is not directly the focus of many people’s financial plan. Whether or not you put a value on your human capital, it is important to consider it when you are looking at your overall portfolio. Here are some items you may want to consider regarding your human capital in your financial plan:
- Diversify. For example, if you work in the auto industry, your financial assets should not contain a lot of auto stock.
- Life/disability insurance needs. If you get injured, how much money would your family or loved ones need to replace your human capital.
- Further education/certifications. If you can increase your future earnings more than the cost of pursuing further education or a professional certification, that may increase your human capital substantially.