Explaining Human Capital

As a reminder, there are 3 sources of capital – Human, Financial and Social. Today, we will expand on Human Capital or today’s value of future earnings from being an employee or business ownership.

Retirement: The process of executing your pre-defined financial independence.

What is financial independence?

Financial Independence: Placing no reliance on a job or anyone else to maintain your chosen lifestyle.

Based on this definition of financial independence – it may sound weird that we discuss something that sounds a lot like ‘work’ in a retirement blog. This definition leads to a common myth that I want to debunk: once retired, you never work again.

First – let me define work as having a purpose in your daily rhythm; it does not have to be your employment. Purpose can be charity work, career shift, or in fact, employment in your dream line of work. We so often focus our goal on retiring to begin then to enjoy life, but I would argue that is an undeveloped goal at best.

To support my argument – we are going to expand on 3 areas of our financial lives that human capital directly impacts:

1)      Working to Financial Independence

2)      Achieving Financial Independence

3)      Working through Financial Independence

Working to Financial Independence

Many of us start our professional careers eager and ready to make our mark. We work through managing the responsibilities of our vocation, enjoying our newfound monetary resource, and taking advice from people we should and should not listen to, with lessons learned. In large part, we center our chosen profession on our upbringing, education, and current financial structure.

I am afraid to use the word unfortunate – but unfortunately, our financial structure dictates how we work, where we work, and what we do. Student loans drive us to accept the highest-paying job out of school rather than the one with the most upside or best fit. Car payments, credit card debt and lack of financial savings skills force our hand in our careers that we do not always desire or agree with because we haven’t identified our priorities. These conditions leave our human capital hamstrung.

This mindset then carries into our prime earning years (for most between the ages of 40-60). We feel that we’ve “arrived” and deserve to enjoy the fruits of our labor. However, we should be reflective in determining our priorities and what it would take to accomplish those outcomes.  In this phase, retirement still feels distant, and at times that no amount of money will ever be enough. Often this leads to decisions that aren’t focused on achieving the outcomes that we truly desire. Instead, we chase the allure by marketers but investing in the “get rich quick” (even though we intuitively know it doesn’t exist) such as individual stocks, private ventures, gold, and other quick-hit wonders (crypto).

Bad, bad, bad. What if the game was changed?

What if we looked at human capital as the most significant asset on our balance sheet? The greatest driver of your net worth? Would you make different career decisions? Would you continue your current course? How would you treat your current financial structure?

I would argue that under this mindset, you’d be move thoughtful before taking on debt, retirement savings would be a monthly habit, and we would think about how to grow income on a routine basis. Human Capital would be maximized, and we would get to define our true financial independence.

Achieving Financial Independence

You, plain and simple, should define financial independence. My definition of financial independence is: placing no reliance on a job or anyone else to maintain your chosen lifestyle.  Here is how I would take control of your financial independence:

1)      Define What Your Lifestyle Is

Sit down and know your lifestyle costs intimately. Know what high future costs you want to plan for (home/car purchase, children’s education, wedding, or just an increase in lifestyle costs). Also, plan for the unexpected (medical bills, loss of a job, or family expansion). I will say, it is easy to save for a down payment but hard to save for an unknown emergency.

2)      Understand How Much Income You Need

Zig Ziglar once said: “You can have everything in life you want if you will just help enough people get what they want.” This doesn’t mean that if you scratch someone’s back, they will return the favor. This means that doing right by others gives you the most happiness, not money. This detachment from materialism may not guarantee income growth, but it may give you a perspective on what you truly need.

However, a common side effect if done with a true heart is that you may experience income growth.

Once you have hit your financial independence – you can begin your retirement process, and it does not have to be when you are age 65!

Working Through Financial Independence

Financial independence is yours for the taking. What this means – your time is your freedom. That is worth repeating: your time is your freedom!

Common retiree thoughts are golfing, travel, relaxation. Those are great, and each person should enjoy some of these easy to identify comforts. However, if this is the pinnacle of your retirement, I would argue you won’t have a fulfilling life. It would help if you still optimized your human capital in retirement.

Here is what the ideal scenario may look like:. A 23-25 begins their career and begins to develop financial skillsets – which include spending less than they earn, saving for retirement, and avoiding debt unless absolutely necessary. As their profession starts to take form, the habits they have formed take center stage through prime earning years by displaying a discipline for priority management, responsible spending, saving for financial independence, and optimizing their lifestyle. By the time they are 45 – 55, they recognize that they don’t have to chase the “get rich quick” schemes to achieve their desired outcomes and get to spend their day pursuing an income that is in line with their values. Happiness abounds by a common theme of serving others.

By age 55-65, this individual enjoys a steady dose of happiness through a lack of financial stress. Clarity and confidence are common thoughts, and legacy planning is of utmost concern. The education of younger generations in the family is at the forefront. Relationships with family and friends are the only things that can cause stress. However, out-living your money is not your primary concern.

The best part – you do not need to be a C-Suite or in the highest tax bracket to achieve this. Your intention at age 24 carries you into your financial independence.

Conclusion:

The traditional definition of retirement is sad. I think it causes more problems than solutions. Retirement traditionally is viewed as a point in time, but you know that I view it rather as a process. I hope that this article has challenged you and supports my argument.

Your human capital allows you to chase financial independence – and you define that. My challenge to you is to define your financial independence and watch how impactful your human capital indeed can be.

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