Human Capital and Your Financial Plan

We are all aware of the “common” asset classes such as stocks, bonds and real estate. But what about your human capital? By definition, human capital is the economic value of an individual's ability to earn an income. If you are an “accumulator” in financial planning parlance, your ability to earn an income is paramount to future financial security. During your professional life, you effectively convert human capital into financial capital by saving and investing a portion of your income. The typical individual in their 20’s may have tremendous potential in human capital but generally little financial capital or savings. This relationship between our human and financial capital generally reverses as we reach our 50’s. If we have earned and saved successful, our financial capital should increase as our earning power decreases.

So how do we invest in our human capital and what are the risks? Obtaining a college degree, continuing professional education, and staying healthy can all increase your human capital. Factors like job stability, income volatility, your industry and company outlook should also be considered when investing your financial resources. Other risk factors to human capital are death, disability and professional competence.

So what’s the takeaway? Your human capital should not be overlooked when putting together your financial plan. When investing, take into account the attributes of both your human capital and financial capital. Mitigate the risks to your human capital with health, disability and life insurance and further investment in your professional skill set.