In a post about human capital, which is the present value of your future earnings, I said
“Human capital is definitely a worthwhile concept in personal financial decisions.”Back then my only real criticism was that human capital should take into account the cost of your basic needs for food, clothing, and shelter. With this caveat, I believed that taking human capital into account when making financial decision was sensible. I’m much less positive about this idea now.
I think that for most people, there is great uncertainty in the total of future income. It’s easy to look back at your life and decide that your career was inevitable, but I doubt you thought this when you were young.
Comparing my career to my father’s is instructive. We had similar technical abilities, but his income was cut short by an adverse health event in his late 30s. If he had already spent some of his expected future high income, the result would have been a disaster. Fortunately for me, I’ve had no serious health problems. Looking at me back when I was 25, it turns out that my human capital was large, but my father’s human capital viewed from his 25th birthday turned out to be modest. These facts were not predictable when we were young.
My thinking now is that human capital is sufficiently uncertain that people should be very careful about borrowing against it. Borrowing for an education that gives good employment prospects is sensible, but borrowing against future income to upgrade your lifestyle is a dangerous game.
On the Positive Side …
Here are a few of my older articles that I still quite like:
The nature of competition in active investing is different from competition in other endeavours.
The impact of MERs on mutual fund returns.
MER drag on returns in pictures.
Many bank fees should be considered interest charges.
Conflicting views of debt.
Hot water heater: rent vs. buy.
Dihydrogen monoxide de-contamination to be costly for municipalities.