Have we ever thought which is our most powerful and strongest form of capital? The answer is, it is our human capital.

Let me put this in a perspective. All those who are engaged in some kind of occupation generate income. For example, someone who is doing job, earns salary, professionals like me earn by way of professional fees and many who are engaged in entrepreneurial activities make money whenever there is profit.

Number crunching

Now let us do a number crunching. Try and replace the income generated from our human endeavor with our investment in any kind of assets.

May it be investment in equity, either directly or through mutual funds, investment in fixed deposits and/or bonds, debentures, post-office saving schemes, or any other Government securities. We may have an extra piece of real estate which may have been leased out, generating lease rental.

Suppose, if we are earning, say, ₹30,000 per month from salary, professional fee or business venture. This will total ₹3,60,000 per year.

If we want to earn ₹3,60,000 a year from our investment in a year either from dividend, interest or rent, how much money we will have to invest?

To earn an interest income of ₹3,60,000 from fixed deposit, if it is giving 8% per annum, we will have to invest ₹45,00,000.

An individual who is earning ₹3,60,000 per year may not have enough funds left of about ₹45,00,000 after taking care of all required expenditure. This calculation will be true in almost all instances, unless there is a large inheritance.

Nearing retirement

Only when we are near retirement we are in position to replace our human capital. If we look at it otherwise, when our other capital is sufficient to replace our regular income from personal endeavour we are ready for retirement or move away from the endeavour of our choice. After that, money will work for us and we will not have to work.

Therefore, human capital is the most precious capital and it is extremely important to protect this asset from a variety of risks it is exposed to.

One of the most frequent risks it is exposed to is illness. This illness could be mild or life threatening. To remain healthy is not only good physiological prudence but also financial prudence.

“Gaurav, I invest all my funds in my business,” my cousin brother told me once. “My business gives my best returns and I am in complete control of it.” As financial planner, I hear this argument often.

My standard reply is “This is brilliant strategy. However, for this strategy to be successful in long term, please ensure, you never fall ill, never retire and never die.”

I am aware while giving this reply that I am being sarcastic but I find it easiest way to drive my point.

High-risk game

Reason businessmen find investment in their occupation most rewarding is because it is extremely high-risk game. If anything happens to their health or ability to perform human endeavour, they will be in misery and at times, could fall into debt.

After noticing the individual is amazed, I clarify.

“If you fall ill, who in your family or near ones will be able run your business with same efficiency and effectively?”

More often than not, my sarcasm hits where it is beneficial to the individual who has said it.

Even to salaried and self-employed professionals, it is important to realise that loss of ability to perform own occupation will put them in mess.

Right strategy

Only way to mitigate risk to human capital is to keep investing in a manner which is not exposed to any kind of our human endeavour.

Having sufficient health insurance cover and having life insurance term is necessary.

Out of variety of risks that our investments are subject to, risk to human capital can be most fatal.

This is because our human capital is the prime source from which we generate funds to create (Read: Invest) other assets.

(The writer is a financial planner and the author of Yogic Wealth)

Related Topics