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.
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.
I somewaht agree with your article. Human Capital makes sense, but it is what you do with it that is more important. Not all people with large human capital succeed in life either finacially or emotionally. I know several doctors and many engineers who struggle because they live to their income and because of the daily stress they endure. Again the way to succeed is to live below your means and know what makes you happy. I mean I am an engineer, but one of my traits that sets me apart from many of my friends and colleagues is the fact that I have DIY attitude and enjoy accompishhing things, which means I would rather pay myself to do a task before paying someone else. An interesting book to read on smarts verses overall ecomonic outcome is “The Millionaire Mind”, by Thomas J. Stanley. Just make sure that you do not always think that more eduction will get you further ahead… A friend of mine (grad school, Masters in Engineering, MBA and several other academic things) owns a company(with 30+ employees) has the big house, nice cars ,etc…, finacially he actually struggles and I am much further ahead than him… Read more »
Millionaire Mind is definitely on my to read list. Stanley is one of my favorite academic writers. No wonder you’re so well read Phil, I wasn’t aware you were an engineer before. That means we have something in common :). I took applied sciences in university and had a great time. Was going to specialize in either materials, civil, or software, but unfortunately the workload became too stressful for me and I did not complete the program. Instead I just went in a whole different direction and took up graphic design, haha. So too bad I didn’t get my degree. I really wanted that engineer’s ring lol. Yeah you only live once so it’s all about having a balanced life in the end. I feel bad for your super accomplished, yet financially struggling friend. Sometimes we just need to de-clutter and reflect on what the important things in life are. Time is the only commodity we can’t make more of.
Time can’t be created, but if you learn how to be more efficient with it, you arguably can accomplish more in a shorter time, which improves an individuals Human Capital 🙂 As to the eng thing, yep was a Mech eng for the past 15 years in R&D, and now as I approach 40, am, will call it retired for now, as the inflow of money appears to be taking care of itself. Learn to earn, learn to save, learn to do things for yourself as young as you can, and things will take care of themselves. Good books and great minds help, they are sometimes just hard to find.
Interesting article. It makes a lot of sense. As for Phil’s comment about how it is also what we do with it…he is missing the part about how human capital would include our level of motivation and ability to manage money. It is not simply school education or experience. It is the sum of all of that and our specific traits.
Nope, not missing the part about how human capital would include our level of motivation and ability to manage money. These are separate things from Human Capital . There are many that have high human capital, but have poor motivation, or poor decision making skills. One of the points i was trying to make is that there are many inputs that need to be considered. Human capital is one. Motivation, is probably another, good decision making skills or the ability to process data for positive trends is another. I was just trying to point out that an MBA with the debt might actually be in worse shape that the inheritance individual if other skills are not there to balance. education does not equal success in life. it can help, but it is not necessary. So to your final statement, yes I agree, it is the sum of all that and our specific traits. from a financial aspect, as long as what’s available or is coming in, is greater than what is going out, you will be finacially successful.
The more I’m learning about human capital the more I’m fascinated by how much it affects our lives. We can even use it to fight against inflation. If we properly maintain our human capital by doing things like keeping our professional skills adequate, or networking within the industry, then we can command fair wages for ourselves regardless of how inflated our currency becomes. 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 for someone else to pay for.
No
opps!!!! Notice you’re are part of the Yakizie Challenge, how’s your page rank? Once my blog goes live (next few days) I plan to join as well
Oh man having a right find day today:) Noticed!!!!!
Thanks, yeah drop by the forums sometimes and say hi. My page rank is pretty low right now, I think it was 2 the last time I checked. Just going steady.
yeah understand, can be tough blogging at times when you don’t have too many readers. BTW I checked out your blog because I love your screen name Liquid Independence really stand out!!!!. Usually don’t click on the name links in comment posts but yours stood out so much I had to.
I’m trying to come up with something more original than just The Dividend Trader, thinking of rob_here_am_I or something like that but undecided yet
Maybe:
Accumulator Rob?
Multiple Rob?
Financial Flux?
Capital ROB? (my personal favourite)
@ Phil :):):) those are all pretty good!
I agree with this perspective — and I find it motivating to continue to improve myself through education and volunteer/work opportunities. The more “assets” I can obtain in character & skill, the better off I’ll be financially.
That’s pretty much it ;). Once we think about it as an asset class then that opens up new possibilities. I wonder if there’s any way to actually calculate what our human capital is actually worth in dollar terms, or maybe it’s for the best if we don’t have one.
Over my lifetime, I have seen undereducated people become successful and over educated ones never succeed! Everything depends on your individual capital.
Wise words my friend. Individual capital wins out almost every time. It’s like how that saying goes: give a man a fish and he eats for a day, but teach a man to fish and he eats for a life time.
Always need a good head on your shoulders to make something out of anything! IN this world, everyone loves to compare one to another. My mom always compares me to her other friend’s more successful kids 🙁 I’m really lagging, but I keep on trying to make myself more valuable! You know there will always be someone who’s better than you in one way or the other and vice versa. Know your own self wealth and make it work to your advantage!
It’s lame how parents compare us to only the more successful kids, what about the not so successful ones? You’re already doing great. Just go at your own pace.
I now firmly believe that time is our most valuable asset. Period. Cool and though-provoking article!
Absolutely, time is money. It’s actually more important than money because we can’t make more time, so it’s best not to waste it. If I could have any superpower in the world my 2nd top pick would be to control time. If we think about it, as long as we have absolute power to time travel, speed up time, and slow it down, we can accomplish just about anything we want. I watched a movie recently called “In Time.” It had this interesting concept where instead of using money, everyone exchanges time as a global currency.
Nice post. I try and improve in both capital areas as much as I can. The reality is though, without human capital, you’re sunk unless you start off rich or get a major inheritance. So, in that regard, your human captial and effective and efficient use of it, is most precious.
BTW – nice work on the dividend income. I noticed that in your sidebar. Do you use a plugin or widget for that?
Cheers,
Mark
Thanks Mark. That’s true. I think it’s always been like that. Many great rulers throughout history became powerful because they first had a lot of human capital, and then acquired materialistic capital because of their personal abilities. My dividend sidebar is just a simple widget called ‘PHP Code’ and in the code I pasted some html and tweaked the values and colors a bit. I took the idea from http://www.outofdebtagain.com/2009/01/where-did-i-get-my-debt-progress-bars/
I think investing in human capital is one of the best investments people can make for themselves. Even companies are willing to help pay for their employee’s education to improve their skills in the workplace. I plan to write more about how to invest in human capital in part 2.
Wow – you just summed up why I still think going to college is a good idea – despite debt! This is an interesting concept. Do you think it not only extends to your job but also what you’re capable of doing? For example, a high school drop out who turns out to be a great entrepreneur? A rarity I know, but there is potential…
I do think it extends to other parts of our lives as well. I see my job as a part of what I’m capable of doing, but my actual worth is the sum of all my experiences and future potential. I enjoy hearing about success stories of drop outs. I never finished university myself (゜o゜).
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