Instead of talking about stock or real estate investments today, I’ll be diving into an often forgotten investment. Human capital is the knowledge, skills or health that you have acquired in your lifetime. Most people think of capital as a CD account, retirement savings or property. But tangible forms of capital aren’t the only kinds of capital that investors need to worry about.
There are a litany of studies that have shown how education will greatly increase your average pay per hour. Even though the cost of college is rising, there are still several different options you have to invest in human capital. Young professionals need to realize they have a ton of earning potential ahead of them and the sooner they invest in themselves, the more gains they’ll see at the end of their career. Most economists would agree that investing in yourself and developing your professional goals is a great investment.
Human vs. Financial Capital
When you’re young you have the benefit of human capital. In this case, human capital would be defined as your career’s earning potential. At the beginning of your career, your earnings potential will be worth a lot more than your financial assets. Let’s look at an example:
Joe is 25 and has 40 years of work ahead of him. He makes $50,000 a year and we’ll assume he earns a 3% increase every year(should account for yearly adjustments and promotions). After 40 years, he will have made $3.8 million. In order to return $3.8 million, one would need an initial investment of $1.15 million invested for 40 years at a return of 3%[1.15 million *(1+.03)^40]. $1.15 million is probably a lot more than anyone has invested in stocks and bonds at the age of 25.
The main point here is that early on, human capital is high and the financial capital is low. Small changes to human capital early on can have a large impact on your career earnings. As you approach retirement, human capital is low, so there is less incentive to invest in it.
The Initial Investment
A key to investing in human capital is increasing your initial investment. If you’re working towards a savings of $500 every month, what do you do with that money? Do you invest it in stocks, bonds or a CD when you could be putting it towards increasing your skill set and your human capital? Many companies have realized the value of investing in human capital and offer it as part of a total compensation package.
My workplace actually offers reimbursement up to 90% of state tuition(Any Cal State school, not UC though). This is an amazing deal for the employee, free formal education that will greatly increase your human capital directly and indirectly. Some businesses even offer a bonus for completing a degree, but even if your workplace doesn’t, think of all the indirect benefits a graduate degree could lead to. You might become a specialist in a certain field and now your position is invaluable to the company. Maybe layoffs come, and your boss knows you just completed a Master’s or MBA, who do you think he is most likely to retain?
Moving Away From Formal Education
Of course human capital does not have to be gained through formal education. If you’re unemployed or just don’t have any extra money to invest in yourself, the internet now provides formal education at a fraction of the cost. In fact, it’s almost all free. Almost everything I’ve ever learned about personal finance I learned online: through google, other awesome personal finance blogs and financial books. I have never paid one cent for education in personal finance and although I might not be an expert, I feel I have a very good grasp on some very complex topics.
I think investing in human capital is a relatively safe investment. We’ve seen the wild fluctuations of the stock market over the past few years, and I can assure you that you will never see that type of volatility with human capital. Investing in human capital shouldn’t seem like a daunting task. The internet has revolutionized the way people educate themselves and there are a wide range of courses, training and knowledge available. There are literally millions of experts out there willing to help newbies like you and I in any field you’re interested in. There is information on everything and it’s up to you to invest your time and start increasing your human capital.
Readers, what have you done lately to increase your human capital? Do you think it’s more important to save and invest in stocks and bonds or yourself?
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-Harry @ PF Pro