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Human Capital vs Financial Capital

Retirement Planning

Human Capital is the present value of your future working income, or lifetime earning power. Contrast this with Financial Capital, or your monetary investments. Over the course of your career, you effectively convert human capital into financial capital by saving and investing a portion of your employment/business income. Clients in their early working years are rich in human capital, but most likely less so in financial capital. Over the years, their human capital is exhausted, but assuming they saved and invested prudently, their financial capital will compound nicely.                                                                                                                                                                                                                                                                                                                                        Pay yourself first and you're well on your way to building your financial capital. Before adding additional expenses of a larger home, newer car, a private pre-school, or lavish vacations, put away at least 10% of your annual income in permanent savings to build lifetime wealth. Likewise always invest in yourself by increasing your skills and be a lifelong learner. Americans are reaching retirement with little to nothing saved and significant debt. A major factor that is contributing to his epidemic is parents funding their children's college costs which are given a higher priority than saving for their own retirement.                 

Many clients ask how they can save for their children's college when they have saved little for retirement. There are options to help pay for college such as financial aid, work study, student loans, and working part-time. The options for a fully funded retirement are much more limited, you can't take a 'retirement loan" and your health will limit your employment options. 

Consider making sure you contribute enough to receive your employer's match and if your self-employed, open up a SEP-IRA for potentially larger contributions based on your business income. If your eligible fund a Roth IRA, Roth accounts grow tax-free, making them one of the best deals out there. Your contributions can be withdrawn at any time penalty free. If the account has been open for more than five years, you can use up to $10,000 of gains for qualified higher education expenses. This makes the Roth IRA an excellent choice to work double duty savings for your retirement and being a source of college funding if needed. 

It's important to make yourself a priority, it doesn't matter how old you are, invest in your own human capital. Investing in your own education and job. You give yourself education and job skills which make switching careers easy and helps you advance ean earn more in your current career. 

In closing, it's important to include your human capital in your financial plan. The goal is make your human capital more valuable so that you can create financial capital which is needed to replace the value of your human capital as the years go by. It's important to insure and protect your human capital especially if others depend on you for their financial future.