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Episode 2699:
Nick Maggiulli's article, "Your Greatest Asset is YOU," reveals that the most valuable financial asset you possess isn't your bank account or investments, but rather your human capital. When wisely managed and invested, this wealth of personal skills and knowledge can yield greater long-term financial returns than traditional investments.
Read along with the original article(s) here: https://ofdollarsanddata.com/your-greatest-asset-is-you/
Quotes to ponder:
"Your human capital can be considered an asset that you use to earn money."
"Each year you work reduces the present value of your human capital."
"By saving and investing, you are rebuilding yourself as a financial asset equivalent that can provide you with income when you no longer work."
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[00:01:00] This is Optimal Finance Daily, episode 2699. Your Greatest Asset is You by Nic Majuli of OfDollarsAndData.com.
[00:01:09] And I'm your host and personal finance enthusiast, Diana Mariam. Now let's get to today's post as we optimize your life.
[00:01:20] Your Greatest Asset is You by Nic Majuli of OfDollarsAndData.com.
[00:01:27] Nearly all articles written about investment and personal finance, mine included, focus heavily on financial assets,
[00:01:34] despite the fact that most of your value, like mine, is likely not contained within financial assets.
[00:01:40] Most of your financial value is already contained within yourself, waiting to be unlocked over time.
[00:01:46] What I'm talking about is a concept called human capital or the value of all of your skills and knowledge.
[00:01:52] Your human capital can be thought of as an asset that you use to earn money.
[00:01:57] Understanding this concept should provide the motivation behind why you should save and invest.
[00:02:02] The thing about human capital is that we can value it if we make some assumptions.
[00:02:07] To understand these assumptions, I'll review a concept called present value.
[00:02:11] Essentially, present value is the amount of money that a future payment is worth today.
[00:02:16] So if a bank promised to pay you 1% interest on your money over a year,
[00:02:20] you could give them $100 today and get $101 a year from now.
[00:02:25] Applying this logic in reverse, 101 a year from now has a present value of $100 today,
[00:02:32] assuming we use 1% as our interest rate, commonly called the discount rate.
[00:02:37] Armed with this knowledge, we can figure out the value of your human capital
[00:02:41] by determining how much money you would make each year in the future
[00:02:44] and bringing all those payments back to the present.
[00:02:47] This is not easy, and I won't go into detail in the math,
[00:02:50] but we can simplify the process with some assumptions.
[00:02:53] If we assume someone makes $50,000 annually for 40 years with a 3% discount rate,
[00:02:59] the present value of their human capital would be worth 1.1 million.
[00:03:04] This means that all of their future income is worth about 1.1 million today.
[00:03:09] I used a discount rate of 3% because most personal injury lawsuits
[00:03:13] use a discount rate of 1-3% when valuing lost income.
[00:03:17] Okay, so you might be thinking, why does this matter?
[00:03:20] It matters because your human capital is a dwindling asset unless you invest in it.
[00:03:25] Each year, your work reduces the present value of your human capital.
[00:03:29] As a result of this, the only way to prevent yourself from not having income in the future,
[00:03:34] ignoring social security, is to either invest, save, or increase your skills
[00:03:39] that you're able to invest or save.
[00:03:41] Over time, you should be able to replace part of your human capital
[00:03:44] with financial assets that earn you money.
[00:03:47] As a result of this thinking, I don't usually imagine money
[00:03:51] as something we use to purchase goods, but as a tool that can be used to produce something.
[00:03:56] Think of it like this.
[00:03:58] By saving and investing, you're rebuilding yourself as a financial asset equivalent
[00:04:02] that can provide you with income when you no longer work.
[00:04:06] So though you have stopped the 9-to-5 grind, your money has not.
[00:04:10] The importance of this concept also applies to a few other domains,
[00:04:13] including educational loans and athletes going bankrupt.
[00:04:17] As I mentioned, your human capital is always dwindling
[00:04:21] unless you invest in it through acquiring further skills.
[00:04:24] However, this is only true if you can get those skills without incurring significant costs.
[00:04:30] For example, going $150,000 in debt for a master's degree
[00:04:34] that will not increase your income substantially is a bad financial deal.
[00:04:39] As for athletes going bankrupt, the idea of human capital is more relevant than almost anywhere else.
[00:04:45] The financial problems of many professional athletes has to do with the mismatch
[00:04:49] between their human capital, that is, five years at $2-5 million, and their investment rate.
[00:04:56] If I had to model their human capital, it would drop off for most of them after they left their sport,
[00:05:02] which is usually a span of four to six years.
[00:05:05] The problem is that most athletes probably don't save or invest as much,
[00:05:09] and if they do, was it enough to live a particular lifestyle for the next 30-50 years?
[00:05:14] Probably not.
[00:05:16] I don't blame them though.
[00:05:17] Humans didn't evolve to have massive amounts of resources dumped upon them over a short period of time
[00:05:22] and then expected to conserve these resources over decades.
[00:05:30] Despite all of the talk of investing on this blog,
[00:05:32] your skills and knowledge will do far more for you than any amount of investment returns over your lifetime.
[00:05:37] I'd argue that you wouldn't be able to invest without the ability to work hard or the ability to save,
[00:05:43] which are both related to your human capital.
[00:05:45] So keep at it and keep grinding away.
[00:05:52] You just listened to the post titled, Your Greatest Asset Is You, by Nick Medjuli of of dollarsanddata.com,
[00:05:59] and I'll be right back with my commentary.
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[00:07:53] I agree that your career is an extremely valuable tool in growing wealth.
[00:07:57] It certainly has been for me.
[00:07:59] I spent over a decade increasing my income and building my skills, including communication skills,
[00:08:04] before I left it all behind to pursue self-employment.
[00:08:07] Focusing on career progression is what got me to where I am today, where I have full autonomy over my time.
[00:08:13] But I think it's important to recognize that your career is a tool, and if you're not careful, it can become a crutch.
[00:08:19] Many of us find our identity in our career and work.
[00:08:22] Our sense of self-worth can be tied to our job title, salary, and whether or not we get that big promotion.
[00:08:29] When we prioritize our careers over our relationships and health, we're setting ourselves up for a rude awakening.
[00:08:35] At best, it leads to burnout, and at worst, it leads to a full-on breakdown.
[00:08:41] I've watched the latter happen to a colleague of mine, and it scared me.
[00:08:45] So while our careers are incredibly important, I also think it's important to keep it all in perspective.
[00:08:51] This article made me think of one of the most popular talks from the Economy Conference a few years ago.
[00:08:56] In this raw and insightful talk, Rich Jones from the Mental Health and Wealth podcast shares how he's navigated his career,
[00:09:04] achieved all his professional goals, and landed his dream job at Google.
[00:09:08] Despite the fact that he achieved all of his career goals, he still wasn't happy.
[00:09:13] Rich helps us understand why no dollar amount, job title, or promotion is going to bring us the happiness and freedom we seek,
[00:09:20] and what can be done about that.
[00:09:22] And you can watch this talk right now on the Economy Conference YouTube channel.
[00:09:26] It's titled The Pursuit of Professional Happiness.
[00:09:30] But that should do it for another edition of Optimal Finance Daily.
[00:09:34] Thank you for being a follower or subscriber of the show, and thank you if you've ever shared this show with someone.
[00:09:39] That's a big help to keep this going.
[00:09:41] Have a great day, and I'll see you tomorrow, where I'll have another post for you and where your optimal life awaits.