What is Wealth
There are countless online articles about being rich and how to define wealth. Even on our own Whitaker-Myers Wealth Managers website, our experts have written many articles on the topic of wealth. Some that come to the top of my mind include:
NUMBER ONE INDICATOR OF WEALTH
HOW LIFE INSURANCE CREATES GENERATIONAL WEALTH
The Wealthy Concept: but make it We(a)llthy!
Most online articles center around defining wealth or being rich by numbers. Showing that you have $1,000,000 as a net worth, thus equating this value to being wealthy or having a gross income of $200,000 (CNBC Survey) to feel ‘rich’ only tells one part of the story. Indeed, being a net-worth millionaire with no debt is a great place to be (our team recommends following Dave Ramsey’s seven baby steps to get there). Still, we all need to understand wealth is a combination of two variables: financial capital and human capital.
Financial Capital vs. Human Capital
Financial capital, as suggested, is the aggregation of all assets, including, but not limited to, invested stocks, bonds, cash, insurance, annuities, livestock, land, and more. All assets and liabilities would be used to calculate financial capital.
Human capital, on the other hand, is the net present value of future earnings. Essentially, it takes all education, capabilities, capacities, grit, focused intensity (to be discussed later), and all the intangible factors that can impact one's ability to grow assets. Understanding how each variable impacts one's financial future is important at various stages of life.
Typical Lifecycle of Human Capital and Financial Capital
Image credit: Retirement & SMSF Investment News & Analysis - Morningstar
The graph above depicts the typical lifecycle of human and financial capital. The Y-axis of this graph depicts total wealth by the summation of human capital (HC) and financial capital (FC).
The highest potential for human capital (green line) is early in the wage-earning years. As students graduate, they have the greatest earning capacity and can potentially take on multiple jobs. However, during this time, their financial capital is usually low compared to later years. Their ability to work is high, but their wages are lower. Financial capital has a nearly opposite story. The traditional investor may start low (blue line), but with consistent smart investing and compound interest, this investor can see their portfolio grow steadily.
As the portfolio grows and financial capital continues to rise, human capital starts declining. Our ability to work more may be present, but our bodies may not agree. The intersection of these two lines is the optimal point for our human capital and financial capital. This is where we can maximize the return for the time commitment. This traditionally happens around the age of 55, approximately ten years before retirement.
Lifestyle Investing
Understanding where you are on the curve plays out in your investing strategies.
Take a moment to point on your screen where you feel you are on this graph. This is very important. Where you feel you are on the graph can determine your risk tolerance and investment selections. *Be sure to discuss this with your financial advisor and ensure they agree.
Strategic alignment and your time horizon should align with your goals. For example, a 25-year-old who recently graduated debt-free from college (yes, it is 100% possible; ask our Financial coach) decides to invest. His investment strategy may be more aggressive, with an equity-to-bond ratio of 90:10.
On the other hand, the soon-to-retire individual may choose a less risky portfolio with an equity-to-bond ratio of 10:90. There are many flavors of this ice cream, so make sure to discuss with your financial advisor which blend and mix of asset classes is right for you.
I’m a fudge sundae guy; you may like a banana split. Neither of us is wrong; we just have different tastes and wants. If you’re looking for friendly advice and a financial advisor team (or someone to eat ice cream with) with the heart of a teacher, our team of advisors at Whitaker-Myers Wealth Managers is always willing and ready to help. Schedule time with them today!
Are you wealthy, rich, somewhere in between, or nowhere close?
March 25, 2024
Summit Puri
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