You may not realize that you are richer than you think. If your net after tax family income is N600,000 a year, you would have received N21 million over a 35 years period while working.
This is not a small sum of money. But, the question is, how you manage the money you received, and how you use the money to build wealth for your family.
Some people are rich and do not realize it.” I especially think it is important to own the word “rich,” because when we think we are NOT rich, we are usually just comparing ourselves to people richer than us. And we likely think, if we are “poor” (or at least, “not rich”) we want to get rich (or at least, get more).
Another thing about being rich is that there are responsibilities to being rich. After all, when you are rich, it is easy to get caught up in stuff and miss out what is truly important.
You may be a lot wealthier than you think. Most people look at their bank account, their retirement plan, add in the value of other assets – their home, other investments, etc. – and then subtract their debt to get their net worth. After the Nigerian stock exhange bust and the bear-market rout of recent years, that number may look painfully small.
But what is your true value? That is, how much are your future paychecks worth? That number is your “human capital” and some experts say it should be a key part of your overall financial planning.
Human capital “is anything that is going to generate a cash flow that is not your investments.”
“It is your ability to work, your ability to get a bonus, to get overtime. It is a gold mine and an oil well, but you are producing the gold and the oil”. “It is millions of Naira when you are 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 is an asset that should be protected and managed just like other assets in your portfolio.
Still, while the concept of human capital has existed for decades and has generated interest among economists and finance experts, there is no guarantee your local financial planner embraces the idea. “Human capital is not as appreciated as it should be.
“Almost no [financial planning] tools factor human capital into retirement planning”.
However, a future job switch or other change may render “that level of precision meaningless”. Thus, “we use the household balance sheet to capture the impact of the level of human capital on the household financial circumstances.” It is how those numbers fit into the overall financial picture of the household that is relevant.”
Diversify, Protect
Whether or not you gauge your future earnings’ value, the human-capital concept implies a more immediate task: Reassess whether your portfolio is diversified. For instance, if you work in the technology industry, then you might want to dial down your investments in tech stocks.
And there are other ways to diversify these days. “The growth of exchange-traded funds (ETF) aimed at specific sectors makes the task of diversifying your human capital easier”. “Now you can short these ETFs… it is much easier to isolate that exposure now”. “There are ETFs [for] virtually every sector.”
Still, some say investors should proceed carefully. “Perhaps a career in financial services might lead you to lower your allocation to financial-services stocks”.
But “rarely would I suggest someone skip an asset class altogether based on their career”.  A real-estate professional, for example, might reduce his exposure to real-estate investment trusts, or REITs, but might still consider investing in real estate.
Another 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 is 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 some survey.
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.
But assessing the return on educational investment is a key before taking on debt. “You have to look at what you will spend on your education and what are the likely [salary] outcomes.”
Part of the Plan
While many financial planners may not overtly embrace the concept of human capital, a client’s expected future income is included in the planning process.
Financial planning in a nutshell, is “here is what you are going to spend, here is what you need to bring in to spend that, how do we plan to get you there?”. “Unfortunately, nobody can say that whatever it is they are doing today they are going to continue doing five years from now.”
Financial planners also incorporate the idea of human capital when they help clients prepare for the possibility of disability, and whether someone’s skill sets would be transferable to another profession or career.

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