Your (Human) Balance Sheet

As mentioned in my introductory post last week (LINK), this is essentially the same article I wrote that was turned down last year by my old compliance department and inspired me of the need to go independent. While most advisors are keen to talk about the benefits of one financial product or another, they are hesitant to talk about your most important asset- yourself! While investing in a 401k allows you to accumulate assets for retirement and insurance products protect your assets from external factors, investing in yourself is the only way to increase your earnings and, more importantly, your quality of life. This concept is known as human capital (as opposed to financial capital), and Michael Kitces has written some great articles on this topic (1, 2).


However, investing in yourself does not mean blowing a bunch of money on “stuff”. Human capital represents those assets that continue to deliver or appreciate in value over time. So no matter how badly I want a Dodge Hellcat (I want one pretty damn bad), it will do nothing to increase my human capital. Instead, I should focus on investing in the 5 most important assets on my human capital “balance sheet”:

  1. Skills. Face it, we are living in a post-industrial economy where your skills are more valuable than your time to employers. Carpenters and engineers make more money than factory workers because what they can do generates more value than simply repeating menial tasks that can be learned very quickly. Skills are valuable because they are developed over a significant period of time with concentrated practice. You may have more natural ability at some skills and less at others, so try lots of things, especially while you are young, to figure out what you have the greatest potential at.
  2. Knowledge. I am probably splitting hairs between skills and knowledge, and while they do have a lot in common, I believe they are separate but complimentary assets. If skills represent the how of doing something, knowledge represents the why. True story: I had become “pretty good” at math in school by practicing problems taught under the traditional curriculum, but it wasn’t until I watched a documentary on the history of mathematics (sounds boring, I know) that everything finally “clicked”. Math suddenly became easier (and more interesting) because I didn’t just know how to do it, but why.
  3. Credentials. This asset class includes not just college degrees, but also technical and professional certifications. I have mixed feelings about our society’s credentialist mentality and could write a damn book about the subject, but I am going to keep it short and simple here. Credentials are meant to represent some minimum competency in a given field (would you agree to brain surgery if the person wasn’t an accredited surgeon?), and can seriously impact one’s lifetime earnings. It has become fashionable over the last decade to shun a college education, and while the data supports that college appears to be a poor investment early on in your career, the fact remains that those with a bachelor’s degree make significantly more than those without ($1156/week vs $692) and have lower unemployment rates (2.7% vs 5.2%). These are median numbers across all age groups, and the spread is much narrower for those in their 20s but much wider for those in their 40s and 50s. You can expect a series of posts on this topic in the future.
  4. Health. Health is a touchy subject and hard to quantify, but I will try to do so using my most hated metric: BMI. According to one study (4), healthcare costs rise 5% for every one-point rise in BMI. If that is the case, then given a set of assumptions (5), a 5 point rise in BMI could cost a 30 year old male almost $1.2 million over the course of his life! Of course, our health affects more than just our wallets. It also has a big impact on our energy, health, and self-confidence, all of which contribute to our quality of life and earning potential. Personally, I have indulged in and enjoyed my retirement from strength sports a bit too much, and I have a lot of room to improve here.
  5. Relationships. This is the big one. Our relationships affect our quality of life and earning potential in so many ways I won’t get into it here. I will say: you don’t have to be a social extrovert to maximize your relationships (but it helps). You don’t have to be a kiss-ass to leverage your relationship with your boss. Family and friends are just as important as business contacts. My job depends entirely on my ability to create, build, and manage relationships, and I would guess yours does too, whether you realize it or not.

Thus far I have only talked about the assets side of the human balance sheet, but liabilities are just as important. I will get more in depth in a later article, but ask yourself- What do I suck at? What do I not know that could be holding me back? What credentials am I missing? What are my greatest health risks? What toxic relationships are negatively affecting me? These liability questions are just as important as your assets, so take the time to sit down and go through your own individual strengths and weaknesses. Life isn’t about being perfect or chasing perfection, but rather being in a state of constant self-improvement and overcoming. There is no shame in where you are now and it is useless to compare yourself to others. The only thing that matters is putting one foot in front of the other.

  4. I can’t find the study now, damnit. Just Google “correlation between BMI and healthcare costs”.
  5. 30 year old male, life expectancy of 80, $4000 average annual cost, 4% cost inflation, 8% ROI (opportunity cost).


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