In a previous post, we discussed human capital and its relationship with financial capital. So what is financial capital?
Simply put, it is the value of all your financial securities and assets. For a young or new graduate, it is either zero, negative or positive. So it is expected that, as you grow and work (smart), your financial wealth (with proper planning) may just baloon! I know you will like this but it takes time, effort, foresight and dedication.
The main difference between your human and financial capital is that when we die, human capital turns to zero and cannot be transferred (barring a written memoir, skills transfer which is not that efficient or some recording of some sort) but financial capital remains and can be transferred to dependents etc unless you chose to finish it yourself.
As you can see from the image above, we build our financial capital (or we should do this) as we age and at a point it peaks. However, depending on what your investment is, it’s growth potential and even how you use your investment, it can keep growing (thereby creating more finances which you can distribute), be flat (i.e. remain at that peak and not go up or down – not always) or even decline (this case can be caused for various reasons like deliberate withdrawal from your portfolio till there’s nothing left!). The chart above represents the last scenario.
It is important to note that if we just fold our hands and do nothing, we will “enjoy” our current wealth and have nothing in the future. The next question is, with most if not all of us hoping to live very, very long, how do we build our financial capital? There are various means of doing just this including stocks, bonds, real estate and some may even argue savings. Each of these have their advantages and disadvantages and with time, we will have delved into this and their nuances further.
First we will need to review where it is we are in order to properly plan for the future.
Until then I remain…
Your Investment Analyst.