With all the hand-wringing going on these days about investments, home values, and the economy, the most important aspect of personal finance—particularly for younger adults—is often forgotten.
That forgotten element? Human capital.
Human capital is defined as “the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value.” Put another way, it’s the earnings capacity of your work. And at a time when stocks, bonds and other forms of capital are not looking like the best investments, there’s never been a better time for you to focus on maximizing your human capital.
As someone whose job is to help people advance in their careers, I’ve long advised people under 30 not to spend too much time dabbling in the stock market. Why? Because it distracts you from investing in something you have far more control over—yourself.
Here’s my Two-Part Financial Plan for Maximizing Human Capital:
1. Avoid debt (including even home ownership);
2. Sock your savings away in cash—that’s right, cash.
A no-debt, cash-heavy position enables you to maximize your human capital in a way that no other financial strategy can. How? By giving you the financial flexibility to say no to a job you don’t want, or hold out for one you do; to negotiate higher salaries without fearing you’ll lose the position; to go back to school to earn a higher degree; or to pursue any number of other career options.
How many people have taken a job they don’t want—or one that won’t look good on their resume—just to pay the mortgage, or because their stocks are down and they’re low on cash? My guess is that number is inching higher every day right about now. That’s unfortunate, and it’s a lesson to learn from—not just for this economic cycle, but for the downturns that will inevitably occur in the future.
What are some steps you can take to begin growing your human capital—your value to current and future employers? Here are a few ideas:
Negotiate for a higher salary when you are offered a job. No matter what a company’s balance sheet says, it ultimately is worth only what someone is willing to pay for its common stock. In the same way, whatever your skills or experience, most employers and recruiters assume you are worth what you’re willing to accept as a salary. For this reason, it’s critical that you negotiate to get what you’re worth. If you accept a salary that undervalues your human capital, it can haunt you the entire time you work for an employer—as the raises and bonuses never catch up to the compensation level you deserve.
Ask for a raise when you believe you deserve one. In the stock market, so-called “value stocks” are those believed to be overlooked and undervalued by Wall Street. Are you a “value stock” at your place of employment? Just as undervalued companies must market themselves to Wall Street with annual reports, investor road shows and other techniques, so an undervalued employee must stand up and be counted. Track your achievements. Measure the results of the projects you complete. Quantify the value you add to your employer’s bottom line. Then, tactfully but firmly, ask to be paid accordingly.
Earn an advanced degree or gain high-value experience. By some estimates, adding an MBA can boost your lifetime earnings potential by as much as 30 percent. But you can also dramatically grow your human capital without going back to school—simply by choosing the right job experiences. For example, line management positions typically have greater value than staff management positions. Or, you might develop technical skills that set you apart from the pack.
Network inside and outside your company to learn about new job opportunities. Even if you absolutely love your current job, one of the biggest mistakes you can make is to not expose yourself to opportunities in other departments and at other companies. Workers typically earn a salary increase of 10 to 15 percent when they take a job with a new company. Capitalism is about supply and demand; you should want as many potential employers as possible to demand your skills, to drive up the value of your human capital. But that can only happen if those employers know about you.
So, are you ready to get your investments in order? Then get out of debt, hold onto your cash, and start investing in yourself. Developing the flexibility to build your human capital is the best financial move you can possibly make.
Sanjay Sathe is CEO and founder of RiseSmart, a $100K+ jobs site and HR service provider that delivers human-powered job search, outplacement and recruitment services via the Web. Learn more at www.RiseSmart.com.