By John Wasik
CHICAGO Dec 21 The end of the year is a good
time to illuminate your personal financial situation in a
different way. Instead of focusing exclusively on financial
capital - how much money you have accumulated - look at your
This calculus of human capital, which economists wonkily
define as "the net present value of your lifetime earnings,"
matters as much to your lifelong financial situation as the size
of your nest egg.
When some people gauge their human capital, they find that
they are not making enough money and decide to make some
changes. That could mean starting a second or third career.
A former chemist I know has become a financial planner. A
friend moved from technical support manager to business
architecture analyst, a big jump from fixing computer systems to
restructuring an entire company.
While my tech-support friend was forced to evaluate his
human capital in short order this year - he was laid off - his
was a model case for how to do it.
First, he looked at the assets at his disposal, which
included a termination package, outplacement services, training
and a healthy emergency fund. Then he determined his immediate
and future monetary needs, the most pressing of which was paying
the COBRA premium to maintain his healthcare coverage.
After enhancing his presence on social media, he brushed up
on his speaking skills through a Toastmasters club and began
talking to recruiters. Eventually, he found a position with a
smaller company as a business architecture consultant. While he
was no longer directly providing tech services, he managed to
leverage his background into a job he finds rewarding.
Investing in your human capital means scanning your personal
balance sheet like this and figuring out how to find a happier
balance between work, family, leisure and passionate pursuits.
Here is what you have to do to run your own numbers:
1. Figure out a retirement plan:
A general rule of thumb is that you need to cover from 60
percent to 80 percent of your pre-retirement income with
savings, pensions and Social Security. There are plenty of
retirement calculators available, including one at Bankrate ().
2. Plan for big expenses:
Saving for college for yourself or your children can be
daunting. You can figure out how much you will need by plugging
numbers into online calculators such as the one at).
Consider other major expenditures that are likely to crop up as
well: weddings, travel, real estate, healthcare costs and so
3. Act like an actuary
Similar to measuring financial portfolio risk, you need to
tally career risk and health risk. If you are in an unstable
company or industry, you will need to think about how to find
Be honest with yourself about your mental stability, too.
This is a linchpin for human capital, because you will have
trouble moving forward if you are depressed. Sad people make
poorer financial decisions, according to a recent paper
published in Psychological Science. Attend to your mental
well-being now, and you can make better choices for your
4. Do the math
When merging your financial and human capital reviews, you
need to strike a balance. If you choose to switch careers, you
will need to quantify how much to change spending and savings.
One comprehensive tool is a program called ES Planner (),
which focuses on how to maintain your standard of living given
all of the variables I have mentioned.
With that information, do a "lifetime balance sheet." As
Boston University economist Zvi Bodie suggests, put your
financial assets and human capital in one column. On the other
side, list liabilities such as taxes, retirement spending,
pre-retirement consumption and other numbers.
5. Be ready to act
If your asset side comes up short, do something about it.
The point of doing this analysis is to come to some conclusions
about your life.
If you do this sort of work on your stock portfolio, you
would rebalance your holdings at the end of it, not just note
the conclusions and muse about their importance. Treat your
human capital with the same kind of respect.
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