December 21, 2012 / 3:41 PM / 5 years ago

Why you need to gauge your human capital

CHICAGO (Reuters) - 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 human capital.

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 forth.

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 better work.

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 portfolio.

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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(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see

Editing by Beth Pinsker Gladstone and Lisa Von Ahn

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