When you think about investing, you typically focus on deciding what kinds of stocks, bonds, and other investments to choose. But to put together an investing plan, you can't afford to ignore the biggest asset you'll ever have -- your own power to earn a paycheck for your work throughout your career.
Most people think of their work as a way to pay the bills rather than as an investment of your human capital. Yet for nearly everyone, work is the biggest source of income you'll ever have, even if you successfully accumulate substantial wealth through investing. Given the importance of human capital to your net worth, you might want to take your job earnings into account in structuring your other investments.
Your job: a stock or a bond?
Last year, finance professor Moshe Milevsky presented some interesting ideas related to human capital in his book, "Are You a Stock or a Bond?" Although many people ignore human capital in their investing plans, Milevsky suggests taking a close look at your job and its earnings potential and figuring out how it resembles conventional investments like stocks and bonds.
For instance, if you have a stable job that pays steady income but has little opportunity for major advancement, then the payouts you receive in the form of your paychecks resemble those that bonds pay. For instance, if you earn a salary of $50,000 and expect to work another 30 years, then your income looks a lot like what you'd get if you owned a 5% 30-year mortgage loan worth about $775,000.
In contrast, if you're an entrepreneur or have a much lumpier income stream that's dependent on unpredictable things like sales commissions or incentive payments, then the payoff on your job looks a lot more like what an investor in Amazon.com
Impact on your portfolio
How you define your job has a huge impact on how you invest your savings. If you have a reliable income, then you can afford to take much more risk during the early part of your career, because even if you lose everything, you'll still have almost all of your future earnings as a safety net. That's one reason why aggressive, high-risk stocks like MercadoLibre
As you age, though, you have fewer years left to live, cutting the value of your human capital. For instance, that same $50,000 worker 15 years later would see the implicit value of future earnings fall to about $525,000. Counterbalancing that, however, is that you'll likely have more in investments after working 15 years. As the value of your human capital safety net declines, you need to get more conservative with your nest egg, favoring blue-chip stocks like ExxonMobil
More than money
Of course, as Foolish retirement expert Robert Brokamp discussed a couple years back in this article on human capital, most people don't choose their work solely through a cost-benefit analysis. But even if you don't necessarily pick the job that will pay you the most over time, knowing how to treat your earnings within your overall investment plan can help you avoid common mistakes like saving too little or not taking enough risk with your investments.
As you invest, pay attention to all your income sources -- not just your investments. Looking at the big picture will help you make better investing decisions.
For more on making the most of your investments, read about:
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Fool contributor Dan Caplinger does his best to leverage his human capital every day. He doesn't own shares of the companies mentioned. MercadoLibre and Vertex Pharmaceuticals are Motley Fool Rule Breakers selections. MercadoLibre is a Motley Fool Global Gains pick. Amazon.com is a Motley Fool Stock Advisor recommendation. Coca-Cola is a Motley Fool Inside Value recommendation and a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't sap your capital.