Net Worth = Assets – Liabilities
So where does our income fall in this equation? Depending on the earning years remaining, this could have a very large impact on Net Worth. A baby boomer in their late 50’s may only have 5-10 income earning years left, whereas an early 30’s millennial has 30-35 earning years remaining.
This gap in number of earning years left is what is known as the ‘Human Capital’ portion of one’s Net Worth.
The value of one’s human capital can vary from person to person though. Factors that make up this human capital include:
- Personal effort
- Income amount
Factoring in human capital a younger person in their 30’s could in fact have a higher Net Worth than a pre-retiree who has diligently saved their entire working career.
So, what can you do with this new found human capital aspect of your financial situation?
- Build your skills, gain certifications, and overall make yourself more valuable to your employer or your customers. The sooner you do this the longer you can benefit financially.
- After implementing item #1 you will likely see your income rise! However; be aware of the dreaded lifestyle creep. Instead increase your Roth IRA savings to the max or increase your 401(k) a couple % each year until you can reach the max. Increasing lifestyle expenses with a small raise or bonus won’t increase your human capital if you don’t let them compound overtime in an investment account.
- Each working year that goes by your human capital will likely decrease if you aren’t able to simultaneously save for the longer term.
Copyright: kchung / 123RF Stock Photo
*This article was originally posted here.
Cameron Hendricks is a CERTIFIED FINANCIAL PLANNER™ practitioner at Financial Symmetry, Inc located in Raleigh, NC. He enjoys developing relationships with new and existing clients and playing a key role in helping them reach their financial goals.
Contact Cameron: 919-851-8200 [email protected]
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