What is your human capital and why is it so important?

Human capital is the projected dollar value of your future earnings, which can depend on your education, training, knowledge, skills, health, habits and other things employers value. How much you earn over your lifetime dictates how much you can afford to spend. Simply put, you can’t spend more over your lifetime than you have in resources. This means the decisions you make regarding your human capital are central to your financial life.

Over your working years, you convert human capital to financial capital by saving a portion of your earnings (see chart). When you’re younger, human capital is your largest asset as a share of total wealth—far surpassing the amount of financial capital (or savings) you have. When you’re nearing retirement, the opposite is true—financial capital becomes your largest asset. This pattern has implications for many aspects of your financial life, including your insurance needs and ability to take on investment risk.