The concept of human capital is an interesting one. A young person may have no significant assets other than the potential to earn money over his or her lifetime. This potential is called human capital. Over time, we turn our human capital into actual assets.
Moshe Milevsky does a good job explaining the idea of human capital in his book, Your Money Milestones. He gets his students to create a personal balance sheet. The first versions they produce are usually depressing; they are full of student loans and few assets. Then he teaches them about human capital. They work out their expected income over their working lives and add that to the balance sheet. Presto! Now they are millionaires.
Human capital is definitely a worthwhile concept in personal financial decisions. However, it is misleading to include future income without considering future needs. We all need water, food, clothing, and shelter. Even the most basic versions of these things have a cost. Nobody wants to end up old and alone eating cat food.
A lifetime of these basic costs should be included in any balance sheet that includes human capital. Without considering lifetime basic costs and the consequences of not having enough money to maintain a minimum standard of living, people may be enticed into taking too much risk.
An example of taking too much risk is Milevsky’s smoothing of consumption over a lifetime. By considering human capital without thinking about future basic human needs, young people may be enticed into excessive consumption that risks their futures. Most young people don’t need more reasons to spend money.