Human capital is an important part of your big-picture financial and life plan. This Financial Planning Association article defines human capital as follows, “Human capital refers to knowledge, skills, and abilities acquired by an individual, traditionally through education and work experience. It is uniquely possessed by each individual and can be enhanced by continued education and job-related training (Becker 1964).” Human capital is critical when considering your financial future as well as ways to reduce risk and maintain financial stability throughout the course of a lifetime.
Youth and Human Capital
For the majority of young people, this is their greatest asset. They don’t have many physical assets such as a house, car or investment assets like a retirement account. Instead they have earning potential. It can be a challenge to figure out the best way to increase earning potential, particularly given the economic conditions since 2008. Often this generation has to take on debt, in the form of student loans, to improve their human capital, and the results of this investment can remain uncertain. The hope is that over the course of a career, we’re converting human capital to financial capital so that we are accumulating assets to prepare for retirement.
Risk Exposure and Reduction
To preserve your human capital, keep your resume up to date and skills related to your industry current. Or develop a second skill set that could generate income; this skill can but doesn’t have to be related to your occupation.
Sometimes human capital is compromised by choice–think stay at home moms, or by necessity, such as when one spouse becomes disabled. The spouse who isn’t the primary breadwinner is forced to return to the workplace or increase earnings. This article considers the importance of human capital, for women, in the context of divorce. Death, disability or unemployment can all affect the human capital of a family unit. Insurance and an emergency fund can help protect against this risk along with strengthened earnings power.
As We Age
As we age, our human capital is diminished. We have fewer working years ahead, and health (of ourselves or a loved one) can play a factor in our ability to keep working. However, retirement security can be affected by your human capital. Having a second career in retirement is a growing trend. It’s both because of lifestyle choice and necessity. The ability to bring in money as you age is particularly important if there are shrinking opportunities in your core career and if you haven’t saved enough to stop working.
This topic might seem like a peripheral part of your financial plan, but it is a critical part of big picture thinking when it comes to risk management and financial success. Be sure to consider your human capital so that you can SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.
Image source: Forbes