Financial capital and human capital. Here at LNWM, we firmly believe that the most successful people constantly pay attention to both. By having this integrated view, people can better navigate the inevitable changes in their lives that hover on the horizon. Defining financial capital is pretty straightforward, it encompasses investments, such as stocks and bonds, cash, real estate, cars, boats and other personal property.
Human capital, on the other hand, is a little more ambiguous since it consists of the more personal things that matter most to you:
- Well-being – health, peace of mind, lifestyle, learning/growth;
- Relationships – family, friends, business network;
- Significance – career, creativity, community and political involvement, intellect; and
- Legacy – children, grandchildren, community and political.
People who are disciplined about regularly self-assessing both their human and financial capital tend to make better decisions in their lives and accomplish more of what matters most to them. This greater self-awareness increases adaptability to major life changes.
LNWM has been in business for close to 50 years, and one of the things we have learned from helping people plan their financial lives is that the people who have the highest level of success in their lives are those who recognize they have to manage their human capital along with their financial capital. If you pay attention to the human side first, you usually make better decisions with your money and take advantage of the opportunities to leverage the money to do the things you care about in life. Lives are built incrementally one decision at a time. When you focus on human capital when making financial decisions, you avoid making decisions on a monetary level that aren’t sustainable in the long-term.
A good example of the misalignment of human and financial capital is the recent housing boom and bust. People bought large houses, probably bigger than they needed or wanted, because they thought it made economic sense. It goes without saying that the end result was a complete disaster. When people pay attention to their values system and what they really care about, they tend to not get in those types of situations as frequently, if ever.
A Quick Self-Assessment
We propose this quick way to help you define your human capital:
If you have a few minutes, grad a pen, paper and an open mind: Write down four words: well-being, relationships, significance and legacy. Then think about how you are doing in each of these categories and give yourself a grade (it could be numbers on a 1 to 5 scale or A to F grades) and write a few comments about each. Maybe you could do better at a specific relationship or perhaps you feel stagnant at your profession, or maybe you rate high in each area.
Save the piece of paper and go back and look at it from time to time, similar to what you do with your finances when you check your savings account or investment portfolio and compare it to last quarter or last year. Track progress and look for opportunities to align the financial side with what matters most in your life.
What you ultimately want to do: make sure that you are not making any decisions that are in conflict with the things that you value on the human capital side, whether it’s that big house purchase, or making investments that are tied up for so many years that they won’t be available for your kids’ college or not doing what you need to do to stay in good health. You need to think about your financial choices and ask: “Am I making decisions that align with my human capital side?”
Answering that question with clarity and higher frequency puts all of us on more solid ground. It takes away some of the uncertainty we feel in our lives when change unexpectedly happens or when we face a life transition.