So who's the richest person in the world today? Sorry Bill Gates, it's Warren Buffet, the CEO of the investment firm, Berkshire Hathaway. I don't think Bill Gates is that sorry, actually. He's still the third richest in the world. Anyway, these guys' fortunes are measured by their financial capital, how much is in the bank and in their investments. Accordingly, Warren Buffet's net worth is estimated at 62 billion dollars. When I started residency, my net worth was negative six figures due to all my school loans...sigh. But there's one thing I have over Warren Buffet, and that is, I may have more human capital than he does...maybe.
Let's examine the concept of capital. According to dictionary.com, capital is defined as "the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc." I don't think this definition is entirely accurate. It leaves out a very important type of capital, that is, human capital. I would add to the definition, "the wealth, whether in money, property, or earning potential..."
You see, there are really two types of capital, financial and human capital. There's the money you have in your wallet, your checking/savings account, or that invested in your house/stocks/bonds. Then there's the money you can potentially generate every day with your time--your human capital. Let's say you wanted to buy something...oh, I don't know, maybe a Guitar Hero video game set, as that seems to be the rage these days. You could take out a wad of cash to pay for it, or you could whip out your credit card. Either way, you're purchasing something with your capital, because you'll eventually pay off the credit card later (hopefully) with what you've earned at your job. This distinction of capital is important, because to set financial goals you have to know what you have to work with.
[Before I go further, I have to disclose that I did not coin the term "human capital," not by a long shot. In fact, the father of economics, Adam Smith himself, has used the term, in addition to subsequent other economists, the names of whom I'm sure you're dying to know for the next Jeopardy round. OK, back to the real blog...]
It is especially important for beginning professionals to realize the concept of human capital, because when you are starting out, you have vastly more human than financial capital...unless you've inherited a fortune from your parents. In that case, this discussion is less relevant to you, but not to say that wealthy people don't need financial advice. I would argue that they need MORE savvy financial management, as they have more to lose. Just look at Ed McMahon, Evander Holyfield....anyway, back to us folks who don't have huge sums in the bank.
Let's delve into a hypothetical. Let's say you make $20/hr. A work year is 52 weeks, and if we assume a 40 hour week, your annual salary would be about $42K. You decide that you want to save at least $5,000 a year to put into your IRA. To save $5,000 a year, you would need to put away about $415 a month.
So how are you going to come up with $415 per month? Most people think the only way to save is to spend less, but I submit to you that as a beginning professional, another great way to save is to utilize your human capital. When you are young, you have the stamina, the health, and if you aren't married yet, the freedom and lack of family responsibilities, to make the most of your human capital. In our example, if you were to work an extra 5 hours a week, you would make your financial mini-goal of saving $415 a month. To some, that may sound like a lot of extra work, but think about the fact that there are 168 hours in a week, and most people work 40. True, we also sleep about 40-60 hours on average, but that still leaves 60-80 hours for potential human capital. Of course, you need a balance between work and a social life. I'm not saying you should be a workoholic and neglect your family and friends, but my point is that there is not a surer thing (besides death and taxes) than human capital. If you have the capability to maximize your human capital, it is better than knowing which mutual funds, stocks, or pieces of real estate to buy. You don't know if your investments will generate you money tomorrow or even in ten years. Did you know the stock market today is essentially at the same level it was in 2000? But work, or human capital=money, instantaneously...well, until it shows up in your next paycheck.
Being young is the time to work hard. To be successful, one has to leverage their unique strengths and opportunities, and a universal one for beginning professionals is that they are able to work more than say, someone twenty years older. I said earlier that when we start out, we have vastly more human than financial capital, so we need to take advantage of that. Because as we age, our human capital will decline. In fact, when we retire, our human capital, assuming we stop working entirely, will be zero. But that's ok, because if you manage your finances well, it's a mere matter of shifting the pendulum to your financial capital. Your investments grow, and the yield from them will eventually provide for you in the future.
You see, there are really two types of capital, financial and human capital. There's the money you have in your wallet, your checking/savings account, or that invested in your house/stocks/bonds. Then there's the money you can potentially generate every day with your time--your human capital. Let's say you wanted to buy something...oh, I don't know, maybe a Guitar Hero video game set, as that seems to be the rage these days. You could take out a wad of cash to pay for it, or you could whip out your credit card. Either way, you're purchasing something with your capital, because you'll eventually pay off the credit card later (hopefully) with what you've earned at your job. This distinction of capital is important, because to set financial goals you have to know what you have to work with.
[Before I go further, I have to disclose that I did not coin the term "human capital," not by a long shot. In fact, the father of economics, Adam Smith himself, has used the term, in addition to subsequent other economists, the names of whom I'm sure you're dying to know for the next Jeopardy round. OK, back to the real blog...]
It is especially important for beginning professionals to realize the concept of human capital, because when you are starting out, you have vastly more human than financial capital...unless you've inherited a fortune from your parents. In that case, this discussion is less relevant to you, but not to say that wealthy people don't need financial advice. I would argue that they need MORE savvy financial management, as they have more to lose. Just look at Ed McMahon, Evander Holyfield....anyway, back to us folks who don't have huge sums in the bank.
Let's delve into a hypothetical. Let's say you make $20/hr. A work year is 52 weeks, and if we assume a 40 hour week, your annual salary would be about $42K. You decide that you want to save at least $5,000 a year to put into your IRA. To save $5,000 a year, you would need to put away about $415 a month.
So how are you going to come up with $415 per month? Most people think the only way to save is to spend less, but I submit to you that as a beginning professional, another great way to save is to utilize your human capital. When you are young, you have the stamina, the health, and if you aren't married yet, the freedom and lack of family responsibilities, to make the most of your human capital. In our example, if you were to work an extra 5 hours a week, you would make your financial mini-goal of saving $415 a month. To some, that may sound like a lot of extra work, but think about the fact that there are 168 hours in a week, and most people work 40. True, we also sleep about 40-60 hours on average, but that still leaves 60-80 hours for potential human capital. Of course, you need a balance between work and a social life. I'm not saying you should be a workoholic and neglect your family and friends, but my point is that there is not a surer thing (besides death and taxes) than human capital. If you have the capability to maximize your human capital, it is better than knowing which mutual funds, stocks, or pieces of real estate to buy. You don't know if your investments will generate you money tomorrow or even in ten years. Did you know the stock market today is essentially at the same level it was in 2000? But work, or human capital=money, instantaneously...well, until it shows up in your next paycheck.
Being young is the time to work hard. To be successful, one has to leverage their unique strengths and opportunities, and a universal one for beginning professionals is that they are able to work more than say, someone twenty years older. I said earlier that when we start out, we have vastly more human than financial capital, so we need to take advantage of that. Because as we age, our human capital will decline. In fact, when we retire, our human capital, assuming we stop working entirely, will be zero. But that's ok, because if you manage your finances well, it's a mere matter of shifting the pendulum to your financial capital. Your investments grow, and the yield from them will eventually provide for you in the future.
Warren Buffet, you have nothing on me! Until next time, may you make some moolah.
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