Human capital is the value of all future wages. If you assume you will earn an average of $50,000 a year over the 45 years of your working life that equals $2,250,000. When you are young, it’s probably the most valuable asset you own. This resource includes all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment and wisdom possessed individually and collectively, the cumulative total of which represents a form of wealth available to individuals and organizations to accomplish their goals. With a strong skill set, that is in demand, the individual will always command a fair wage, no matter how inflated your local currency becomes. Anything you do to increase your ability to earn higher wages could be considered investing in your human capital. The monetary and time-consuming investments you make early in life, like getting a higher education, doing on-the-job training, and learning better social skills can increase your personal human capital. Even traits like punctuality, neatness, loyalty, and leadership count towards an individual’s human capital.
Over your lifetime, your human capital and investment portfolio should go in opposite directions. When you first start out in your career, you have years of earning power that awaits you. But your investment portfolio is low because you probably haven’t saved very much. As you age, you have the opportunity to use your human capital to increase the value of your investments. It is an opportunity not a given, because growth of your investments portfolio funded by your wages are subject to risks of overspending and making poor investment decisions. If you save and invest 10% of your income during your working years and earn a 6% return, you would have $1,154,000 to spend in retirement. When making investment decisions factors like job stability, income volatility, and the industry in which you work should all be considered. If the risk of a future earnings decrease is low then making riskier investments decisions make more sense.
Like any other asset class, there are risks associated with maintaining your human capital. One is the death/disability risk and the other a competency risk. When you are a young adult, it is very important to protect your human capital with both life and disability policies. These policies will protect you or your family against human capital shortfalls that may arise from an untimely death or a career-halting illness. The competency risk is associated with becoming too comfortable with your career path and not investing in life long learning. Make sure you stay current with industry trends and new technologies to protect against this risk. You don’t want to be the acknowledged expert in a technology that is extinct.
Corporate America is recognizing the importance of human capital. This recognition differs from a more traditional approach where human resources were primarily seen as a cost to be minimized, not as an investment in the future. Labor markets sometimes favor employees and sometimes employers but the trend especially in the high tech sector is towards developing a culture that attracts and retains the best talent. This environment favors working together instead of competing, team-building, working from home instead of from an office, and greater access to management and information. Organizations go out of their way to prove they are good for the environment, their customers and the local community. These trends are not affecting just the white collar worker but skilled trades-workers as well. The manufacturing industry is experiencing exponential change as artificial intelligence, robotics, and the internet are rapidly changing the workplace. Deloitte Consulting, in a recent report, projected that between 2018 and 2028 there could be as many as 2.4 million unfilled manufacturing jobs. Many of the more technical positions pay in excess of $65,000 a year. Individuals should look at the trade off of utilizing their human capital in pursuing a college education which may involve substantial debt or the skilled trades where on the job training may be available. The worst case for the development of human capital is attending a 4 year college and dropping out after a few years without a degree and deeply in debt.
Managing human capital is ultimately up to each individual. Over your lifetime you will be faced with myriad decisions that have a direct impact on how large or small your earning stream may be, the investment of that earning stream, and how best to protect it. Human capital is focused primarily on monetary security not human satisfaction. You may make decisions that increase your contribution to the goodness of humanity, instead of monetary considerations, and that may give you more life satisfaction.
