Taking Center Stage
IT'S THE ONE ASSET we’re all born with, and it pretty much defines our financial life. I’m talking here about our human capital, our ability to pull in a paycheck.
That paycheck—or the lack thereof—drives our ability to save, service debt and take investment risk. It also dictates our insurance needs and how much emergency money we should hold. Put it all together, and our human capital should arguably determine how we manage our money over our lifetime.
Let’s start with our early adult years, which are often marked by substantial borrowing as we pay for college, buy that first car and purchase a starter home. Yes, the amount of debt involved can be frightening, and we should be careful not to overdo it.
Still, borrowing in our 20s and 30s is often a rational strategy, allowing us to jumpstart our financial life. After all, if we couldn’t borrow and instead had to pay cash for college or for our first home, many of us would have to spend a decade or two scrimping and saving before we notched those two milestones.
Indeed, borrowing to pay for college or technical training can be a smart investment because it can greatly boost our human capital's value. One obvious payback: The resulting larger income will allow us to save more each month. The goal: amass enough money so one day we can live solely on our financial capital—and we no longer need the income generated by our human capital.
Human factor. How should we invest our savings? We might view our human capital as similar to a bond with its predictable stream of income. That regular income frees us up to invest heavily in the stock market. How much of our portfolio should we stash in stocks? We might ask ourselves three questions.
First, how stable is our job? The more secure it is, the more we could potentially invest in the stock market, knowing it’s unlikely we’ll need to tap our portfolio to pay for a long period of unemployment. Second, how much will we likely save in total between now and when we retire? We might view those future savings as part of our portfolio’s bond and cash holdings, allowing us to be even more aggressive in allocating our portfolio to stocks.
Third, how near are we to retirement? When we get within 10 years or so, we’ll likely want to boost our portfolio’s bond and cash holdings, so we have a pool of conservative investments that we can draw on for spending money and which can replace the soon-to-disappear income generated by our human capital.
What if, during our working years, misfortune strikes and we find ourselves without a paycheck? That might happen if we lose our job, become disabled or fall ill. We might even suffer an untimely demise, leaving our family without any way to support itself. This is the reason to have both an emergency fund and three crucial insurance policies: health, disability and life insurance. We can think of these precautions as protection for our human capital.
Making progress. Our human capital doesn’t just allow us to pull in a paycheck. It also offers us the chance to enjoy that pleasant feeling that we’re being productive and making progress. Of course, we don’t need a job to feel productive. Instead, we might volunteer, or help with the grandchildren, or work on our health, or do countless other things.
Even though my cancer diagnosis means I have limited time left, I still hunger for a sense of progress. I find it hard to devote a day to deliberately doing very little or focusing solely on activities for my own enjoyment. I feel better if I’ve spent the day being productive, and doubly so if I feel I’ve been helping others.
I suspect that most folks aren’t as restless as I am. But I also suspect almost all of us feel better when we end the day with a sense of accomplishment and devote at least part of the day to activities that help the wider community.
That brings me to retirement. Even after we quit the workforce, we’ll likely find we still hunger for the sense that we’re being productive, hence my frequent suggestion that folks continue to make use of their human capital during their initial retirement years—by working part-time.
That part-time position may make for a financially less stressful retirement, while also offering the sense of accomplishment we humans crave. Looking ahead to retirement? To our to-do list, here’s one more item to add: Think about how we might continue to make a little money by working a few days each week. Maybe folks will ultimately decide that isn’t something they want to do during their retirement years. Still, it can’t hurt to give it some thought.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles, including last week's installment of this six-part series.The post Taking Center Stage appeared first on HumbleDollar.
