Its likely that when you think of asset classes, you think of stocks, bonds, commodities, real estate, etc.
And when you think of your Financial Capital, you likely think of your house, your retirement accounts, your savings accounts.
But what about you? What about you as an asset class?
Also known as Human Capital, it’s your ability to earn money and to increase the value of being able to do so through time.
Your ability to keep yourself healthy and to keep your skills relevant is the most valuable asset you will have through the course of your life.
Why? Because it’s directly linked to your ability to build your Financial Capital.
Your Human Capital is highest when you just start out your career. The present value of your future earnings is likely never going to be higher than this phase of your career.
Your ability to earn money, depending on your industry and occupation, likely will peak in your 50s. What this means to you is that it is crucial that you use those years in the most optimal manner you can, as these are your working years.
For most people, once they reach their 50s, they have plateaued in their field. And that’s if their lucky and aren’t actually starting to earn less, which can happen if they lose their job and then need to find a new one.
So, what’s the best way you can protect your Human Capital and make it grow?
1. Get the best education you can afford (this is not the same thing as the best education possible. The best education possible isn’t going to help you much if you have accrued tens of thousands of dollars in debt along the way).
2. Continue that education through the course of your profession. There are no jobs that are static in skills. Every single job now has skills that become less relevant through time, and skills that become more in demand.
3. Keep yourself healthy mentally and physically. Without both types of health, your productivity will be affected and your value to an employer will be diminished.
4. Have sufficient health insurance and Long Term Disability insurance.
And, since your Human Capital reaches it’s peak in your 50s, if not earlier, you need to start applying your earnings to your Financial Capital (eg savings accounts, retirement accounts) as soon as you can because this, your Financial Capital, is where your overall capital will have to start shoring up the loss in your Human Capital.
Nothing is more important to your Balance Sheet than starting your savings as early as you can in your career, because as your Human Capital begins to fade, your Financial Capital will need to take over.
This is the essence of Retirement Planning, and without really grasping the importance of this, you will find yourself in your 50s, seeing your career fade, with diminished Human Capital and nowhere near the Financial Capital you need to let you sleep well at night.