Total Capital

Generally speaking, wealth is measured in Total Capital. Let us take a look at how that is determined. Total Capital, one can say is divided into two parts – Human Capital and Financial Capital.

Human Capital can be defined as the future earning potential, whereas Financial Capital is arrived at based on one’s Net Worth at any point of time.

Total Capital = Human Capital + Financial Capital

Financial Capital

The financial capital which is our Net worth is defined as;

Net worth = Net Financial Assets – Net financial Liabilities.


Human Capital

What is Human capital? Human capital refers to the investors future earning potential/income.

There are many complex formulae framed by different organizations and academicians – we are not worried about the formulae and instead we will focus on the different factors which affects the Human Capital.

Number of years of employment left

The longer I keep working, the larger my Human Capital. Hence,

Human Capital ∝ Number of years of employment left

Number of years of non-working life left

Well… nobody can predict how long we will live after retiring from active work. In general, our Human capital is NIL after we retire and there is no earning potential left in us.

Human Capital ∝ 1 / Number of years of non-working life left

Annual salary growth rate

Human capital is the present value of your future earning potential. So higher a salary growth rate in the future, higher would be your future earning potential.

Human Capital ∝ Annual Salary Growth rate

Volatility in earnings

If your earnings are based on commissions or bonus, greater the volatility of your earnings. When something is not predictable, it affects your Human Capital negatively (however small). So greater the volatility, the lesser your Human Capital. Hence,

Human Capital ∝ 1 / Volatility in earnings

Pension availability

If your job entitles you to a future pension after retirement, you are extending your earning potential beyond your working years, which means higher Human Capital. Hence,

Human Capital ∝ Pension availability

The volatility in earnings part can actually decide if your Human Capital is Bond-like or Equity-like.

Let’s say you make your earnings from bonus/commissions, then your earnings are more “Equity” like. Because your earnings are Equity-like, you would be better off having more cash, cash equivalents and bonds in your portfolio.

On the other hand, if you were to earn a steady income with a fairly secured job, then your earnings are “Bond” like, and you can afford to take a bit riskier assets like equities to build your financial capital.

Bottom line, your Human Capital has a big part in deciding how you should invest your financial capital.

How can you improve your Financial Capital? Well, the answer is obvious isn’t it? Get in-demand skills in the market which will in turn get you lucrative jobs! 

Two-part question to you (which will be answered in subsequent sessions)

Should I protect my Human Capital? If yes, how can I protect my Human Capital?

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