You may be a lot wealthier than you think. Most people look at their 401(k) or other retirement plan, add in the value of other assets — their home, other investments, savings, etc. — then subtract their debt to get their net worth. After the housing-market bust and the bear-market rout of recent years, that number may look painfully small.
But what’s the value of you? That is, how much are your future paychecks worth? That number is your “human capital” — and it should be a key part of your overall financial planning.
Human capital is anything that’s going to generate a cash flow that isn’t your investments.
It’s your ability to work, your ability to get a bonus, to get overtime. It’s a gold mine and an oil well, but you’re producing the gold and the oil. It’s millions of dollars when you’re in your 20s.
As you age, your financial assets increase and your human capital — the value of your future earnings — decreases, because you have fewer working years ahead. While your human capital is not cash in hand, it’s an asset that should be protected and managed just like other assets in your portfolio.
Important task: Protect your human capital with life insurance (if you have dependents) and disability insurance.
If we were as focused on human capital as we should be, [everyone] would have disability insurance.
That’s because, given the value of your paycheck, you need to insure against its loss. Just over one-fourth of today’s 20-year-olds will become disabled before age 67, according to the Social Security Administration.
Also, your human capital may help you decide whether to go back to school. Investing in your human capital may give you the option to work more years.
http://www.marketwatch.com/story/youre-richer-than-you-may-realize-2011-04-25?pagenumber=1
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