Thursday, 28 April 2011

Human Capital

From the Yahoo! Finance pages:

You may be a lot wealthier than you think. Most people look at their 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 some experts say 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", said Moshe Milevsky, a professor of finance at York University in Toronto.

"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," he said. "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, Milevsky and others said.
Something to bear in mind before you pack in your career to become a full-time advantage gambler.

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