Your Human Capital

AS YOU TRY to get you arms around your finances, you might begin with what’s likely your most valuable asset—yourself. Economists refer to our income-earning ability as our human capital. Our regular paycheck—or lack thereof—should figure into many of our financial decisions, including how much debt we take on, how much emergency money we need, what insurance we purchase, and what mix of stocks and bonds we buy.

For instance, if you’re a government worker with a steady job and a traditional pension upon retirement, you may not have huge lifetime earnings, but your paycheck doesn’t involve much risk. That means you can probably take a fair amount of risk elsewhere in your financial life, including investing heavily in stocks and using an adjustable-rate mortgage to buy your home. But if you’re a small-business owner, you are taking a lot of risk with your human capital—and you may want to favor bonds in your portfolio, keep your debts modest and build up a large emergency fund.

You will also want to protect your human capital, which means buying health and disability insurance, and perhaps also life insurance if you have a family that depends on you financially. Maybe more important, you should save part of the income generated by your human capital, so that one day you will no longer need a paycheck and you can retire.

Throughout this guide, you’ll be encouraged to think about your human capital as you tackle the four goals many of us share: paying for retirement, buying a home, putting the kids through college and rigging up a strong safety net to protect our family.

As we pursue these goals, we’ll do all manner of spending, saving, investing, taxpaying, borrowing and giving, each of which has its own chapter. There are also chapters devoted to the financial markets and investment math for those who don’t mind a little complexity. Not everything fits neatly into these various categories. That’s why the guide tackles various life events. To wrap up things, there are chapters devoted to different numbered lists, how to draw up your own financial plan, and a refresher on key concepts.

Next: 10 Questions to Ask

Previous: Today’s Personal Finances

Blogs: Human ConditionTimely Tale and A Price on Your Head

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