Proposal: A Formula for Your Personal Human Capital
Calculating your net worth is easy. First find the value of all your assets, including your bank accounts, cash lying around the house, investments, and major assets like real property. Next find the value of all your liabilities, including loans, credit card balances, bills you have to pay soon. Subtract the liabilities value from the assets value and you have your net worth. If you want more detail around that, here’s how to calculate your net worth, with discussion about nuances of the calculation.
Knowing your net worth is a great starting point for gaining control of your monetary situation with an eventual goal of financial independence. Net worth provides an answer to “Where are we now?” that is essential, especially when tracked over time, for feedback on whether your financial decisions are working to your benefit.
Net worth is only part of the story of a person’s full worth. You’ll also need to track your income and expenses to give yourself context for increases or decreases in your net worth month to month. But even this does not tell the complete story.
Financial capital is the monetary value of everything you own, your net worth, but human capital looks outside of just today’s assets and liabilities. Human capital has many definitions, but from a personal perspective, your human capital is your ability to earn income or increase your net worth in the future. A human resources department look at human capital from the business’s perspective, but that’s not what the intent is here.
Personal human capital much more difficult to measure than net worth or financial capital because it relies on qualitative analysis rather than quantitative analysis, and requires some educated guesses rather than provable measurements.
It’s possible to increase your human capital by achieving certain tasks or taking a specific approach to living your life. If it’s possible to increase something, there must be a way of measuring it to determine if you’re successful, and if so, how successful you are.
In general, the things that increase your human capital are also likely to increase your appeal to potential employers. Some companies refer to their employees as the “human capital” of the business, and that concept isn’t far from what I’m exploring.
These are the factors that will go into the formula for calculating your human capital. This is an open discussion; if you have any suggestions for tweaks, provide comments below, and we can discuss changes, and ultimately build an official human capital formula.
Education related to the field you’re pursuing. Some careers require more advanced degrees than others. For example, doctors complete a graduate medical program beyond earning a bachelor’s degree and have residency requirements before they can be placed in a full position; a teacher requires state certification, in some cases a master’s degree, and continuing education; a certified public accountant requires a degree or experience plus a successful certification.
In general, the more education you have, the more you have an ability to earn more money throughout your lifetime. The biggest gap is between those with just high school diplomas and those with a college education.
Let’s call this variable er (for education — related). Its value will be the years of education beyond high school that pertain directly to your current employment. It may be zero if your work is in a completely different field than your education.
Other education. It’s very common to pursue a career unrelated to your degree. Many friends studied one subject in college and either found a passion in another field or were faced with reality that seemed to required pursuing a career in a more lucrative position. Not all unrelated education are equal in terms of human capital, however. An education in music limits what you might be able to pursue other than an arts-related career if you aren’t already in an arts-related career.
The pertinence of the specific course of study decreases as you distance yourself from college through time, so at some point, it’s more relevant that you’ve earned a bachelor’s degree — any bachelor’s degree — than what you studied. This variable will be es (for education — supplemental).
Your remaining years of work. Your age plays a role in your human capital, but it’s related mostly to how many years you may be able to continue working, from either a physical or mental perspective. This is impossible to predict with certainty, but an estimate is fine. Unless you work at a job that is literally killing you slowly, it’s safe to say you can continue working until you’re at least 70 if you need to. So one possible approach is to subtract your current age from 70. This variable will be labeled y.
Your years of experience. The more you work in your field, the more of a chance you have of receiving jobs with more responsibility and higher compensation. Jump to a new field, and if your job function is different, you may have to work from the bottom again. Measured in years, your experience will be called x.
Your brand cultivation. If you’re well-known in your industry — perhaps you are a published author, speak at conferences, or are a household name — you are better positioned for earning a living in the future. Judging our own brand presence is difficult to do, and the more popular you seem to be, the more likely it is you’ll overestimate your importance. Neil Gaiman can probable call any television producer and get a job writing a script for writing any television show and his books are quite popular, but his talents may be overshadowed by the shadow of the brand of someone like Stephenie Meyer, whose agent can likely close a lucrative deal with one call.
And just ask any reality television star who was famous for fifteen minutes — your brand can disappear and lose relevancy in an instant, so this is something that can change frequently.
Just give yourself a brand cultivation value of 1 to 10, with 10 being a name you see in the media every day, and 2 being published for a niche audience, like a scientific journal. This will be the variable b, and I expect most people should rate themselves a 1 or a 2.
Your human network. How many people call you call out of the blue and ask for a favor, with a reasonable expectation that these people will help you to the best of their abilities? That’s the real value of a human network. If you can tell someone you need a job and they can come back with some suggestions, you’re able to make use of your human network. If you haven’t cultivated a network, your reach is smaller. This is similar to a “Klout” rating on Twitter; how influential are you?
Forget about your number of LinkedIn connections, Twitter followers, or Facebook friends. How many people can you really count on to be connected enough and willing to help you in a time of need? This is the value of your human network, or the variable n. It has a maximum of 60, because after about 60 the value of each additional connection will decrease.
Your involvement in a community. If you are involved in volunteering for an organization or active in your local economy, your human capital is higher. Involvement tends to increase your human network and your brand cultivation, but it has value just on its own. Consider how involved you are in activities outside of your job, on a scale of 1 to 10. This is the variable i.
Your drive for advancement. You will only move forward if you want to succeed. I’ve worked with people who were satisfied with where they were in life. They had no desire to earn more money, no desire to advance in their jobs, no desire for additional responsibilities. That’s a happy place to be, and if that’s you, you’re bound to stay roughly where you are. But if you’re fully driven to advance and are motivated to move forward with the income-earning aspect of your life, you can reach the potential that is promised by the other factors.
It’s not bad to not be driven towards advancement. Many people put a higher priority on other aspects of life, like family. There’s no judgment of values, but the drive to move forward greatly affects your human capital and earning potential. Rate your drive from 1 to 10, and label it with the variable d.
Your health. Health is important because it can affect your ability to earn income over your lifetime as well as your likelihood of facing a medical problem. Of course, someone completely healthy can have an accident that requires expensive medical care. Insurance companies do a good job of understanding someone’s health profile and likelihood of costs related to that person, but there’s no need to get that level of detail for our human capital calculation. All I would look for is a health rating, from 1, dying, to 10, in great shape with no real health risks.
Smokers receive a low rating while working out regularly would move the needle higher. This is the variable h.
Bonus points. Special skills and attributes are bound to affect your human capital. Use this list to define a value for the variable z, with a maximum value of 10. Add one point…
- … for each major language you speak mostly fluently, other than your primary language.
- … if you are an optimist rather than a pessimist.
- … if you are proficient at public speaking.
- … if you have a variety of interests outside of your career.
- … if you can play a musical instrument or are otherwise inclined towards a talent with arts.
- … if you are skilled in the forward-looking field (as an application developer, for example).
- … if you are able and willing to be flexible with your future goals and career paths.
- … if you are self-motivating and like to get things done.
- … if you have a strong support network of friends and family who help you emotionally, not necessarily with business
- … if you travel at least occasionally, exposing yourself to different cultures.
Now that we have all the variables, we need to put them into a formula that makes sense.
Ch = (y + 0.1d × (er + 0.5es + x + 5b + 0.25n + 0.5i + z) ) × Log(h)
The result, Ch, is a factor for human capital that can be applied to your income today to predict your future lifetime income.
Example
Let’s say a person for the example, Harry, has two years of post-college education relating to his field and four years of unrelated education. At the age of 35, he has at least another 35 years of work ahead of him if he does’t retire. He has 10 years of experience in his current role. He is relatively unknown in his field, but is well-respected within his organization, so his brand penetration is a value of 1. He has worked to build a network of colleagues and leaders in his field, and estimates there may be 10 people he can count on if he needed a professional favor.
He is moderately involved in his community and with his college alumni association, and rates himself a 5 in this area. He rates his health a 7 thanks to eating well and exercising regularly. let’s say Harry’s fully driven, with a score of 10 out of 10 in that category.
Harry receives 6 bonus points based on his answers to the above questions. Using the above calculation, his human capital, Ch, is 54.93.
Now that we have a number, we need to know if it’s good or bad. In the formula, brand cultivation is heavily weighted. If you’re famous, the possibilities are almost endless. I did limit the factor, though, because as I mentioned above, most people are likely to overestimate the importance of their own brand. A good result will be higher than the number of working years left (y) plus ten, a mediocre result would be around y,, and a bad result would be below y..
We can use the number to estimate the future income of a person, not taking inflation into account. With a result of 48.83 and a salary today of $50,000, we can roughly estimate Harry might earn $2,746,569 over the rest of his career. That takes into account his potential for growth, which relies on things like his brand strength, his health, his experience, and his attitude.
You can’t always just use your annual income as a guide, though; if your income is not sustainable or temporary, use a figure that is similar to what someone who does your work might earn if the extra circumstances weren’t applicable.
Is this accurate? It would require extensive research to determine if the income prediction is valid, but the purpose of the formula is to create a metric that can be used to track progress in the increase of human capital over time as well as person-to-person comparisons.
What do you think about the formula for human capital? Do you agree with the weightings? Are any factors missing?
Article comments
Not sure where it would fit but general work attitude and ethic. In most office settings you could be a superstar but if your attitude sucks and you lack work ethic it could be like a cancer and bring down an organization.
I think the note about being optimistic is important. If you look around, you will find that people who are really pessimistic in nature are very difficult to be around. As well, pessimistic people often do not accomplish as much and are much less satisfied with everything, including themselves. Interesting thoughts in this article for sure, thanks for sharing.
Very interesting, I’ve never seen an attempt to mathematize this. You equate human capital to future earning power. The context in which I usually encounter the term human capital is in that presented by James E. Hughes in Family Wealth – Keeping it in the Family.
His theory is that the wealth of a family is the human and intellectual capital of the family members and that the financial wealth of the family is used to support growing the human and intellectual capital.
I’ll have to read the book. It doesn’t sound like we’re too far off each other. Human capital can mean slightly different things, but I’ve couched in in the context of future earning potential simply because this site is about financial independence, and I try to steer what I can in that direction. One could stop when arriving at the “human capital factor” ch and just use that as an abstract number for comparison; I thought of gearing the equation toward a factor that can be used to derive future earning potential would be more meaningful to the audience.
It is interesting to play around with the numbers and see what, in theory, could affect earning potential and by how much. It would take a lot of data to test the equation considering there are, in real life, so many variables that affect such earnings over a long period of time.
Based on the formula i come in around 2.2 million for future earnings,am currently 31 years old, and had a good rating. Seems ok to me. I’d like to think future earning will end up higher than that. Would be interesting to see how close this amount is to reality.
Sounds like a good result!