Answer: You!

To a student with little in the way of financial assets, this is a critical question for them to answer. Why? Because it provides them with the right mindset as they are coming to conclusions about their post-high school life.

From “Of Dollars and Data,” one of my new favorite blogs:

Nearly all articles written about investment and personal finance (mine included) focus heavily on financial assets despite the fact that most of your value (like mine) is likely not contained within financial assets. Most of your financial value is already contained within yourself, waiting to be unlocked over time. What I am talking about is a concept called human capital, or the value of all of your skills and knowledge. Your human capital can be thought of as an asset that you use to earn money. Understanding this concept should provide the motivation behind why you should save and invest.

He goes on to introduce the concept of present value to come up with a dollar value for human capital based on a future income stream discounted to the present using a discount factor. The example he gives is pay of $50,000 over 40 years discounted at a 3% rate yields a present value of $1.1 million. The point he makes is that human capital is an asset that eventually declines over time which explains why saving is so important.

He provides this nifty graph to display this concept:

Here is how the blogger now thinks about money:

As a result of this thinking I don’t usually imagine money as something we use to purchase goods, but as tool that can be used to produce something. Think of it like this: by saving and investing, you are rebuilding yourself as a financial asset equivalent that can provide you with income when you no longer work. So though you have stopped the 9 to 5 grind, your money has not.

So, in short, your savings allows you to replace your dwindling human capital, so when you stop working you can still retain a decent quality of life.

Questions for students:

• Why does human capital decline over time?
• What would the Financial Assets chart look like if you waited 10 years before starting to save?
• How can you improve your human capital? Provide some concrete examples.
• The decline of human capital looks pretty steady in the chart? What are some external factors that can dramatically change one’s human capital?
• Describe one takeaway you have after reading the article and analyzing the chart.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.