For the next week (or two), we’ll be sharing “audition” pieces from folks interested in being new staff writers at Get Rich Slowly. Your job is to let us know what you think of each of these writers. Pay attention, give feedback, and after a couple of weeks we’ll ask which writers you prefer. This article is from Will Crosswell, who says he’s a young guy who’s made some dumb moves financially. But he wants to learn.
Dr. Moshe A. Milevsky, author of Your Money Milestones and tenured finance professor at the Schulich School of Business at York University in Toronto, Canada, had his class perform an exercise at the beginning of his twelve-week undergraduate course on the topic of wealth management. He asked his students to prepare their own personal balance sheet.
As he admits in his book, the financial status of a twenty-something looks much different from somebody in her thirties or forties. Assets are few and far between. And where they exist, they’re minimal. But liabilities include loans, student loans, and even credit card debt.
After the class filled out their personal balance sheets, he asked them to compute their net worth by subtracting their assets from their liabilities. The results were bleak.
He followed the exercise with two questions:
- Do you think your personal balance sheet will look better ten years from now?
- How many of you got a zero or negative number for your net worth on the balance sheet today?
As you can guess, nearly every hand went up in response to these questions. Dr. Milevsky pointed out: “If they were a publicly traded company… they would immediately be deemed insolvent or even bankrupt.” But there’s a “twist.” Milevesky told the students that they did the exercise incorrectly and they answered his questions all wrong. He suggested that they were probably forgetting the most important and most valuable asset they own: themselves. Or, as Milevsky terms it, Human Capital.
Human capital included the students’ careers, with their salary, bonuses, raises, and wages that would accrue over a lifetime. Milevsky compared Human Capital to a gold mine or an oil well: It has immediate value, but it may take years before you see it total in the six to seven figures in terms of cash flow. His main point was this: Human Capital is the most valuable asset class for most people during their working years .
He then asked the class to include the estimated current value of their human capital to create what he called a “holistic personal balance sheet and net worth calculation.” He asked the class to visit the campus alumni office to obtain projected salary figures for graduates.
Below is an example of what a holistic personal balance sheet might look like:
|My Assets||My Liabilities|
|Explicit Financial Capital||-Visible Debt and Liabilities|
|+Implicit Financial Capital||-Estimated Hidden Liabilities|
|+Estimated Human Capital|
|=Total Capital||= Holistic Net Worth|
After they completed their new balance sheet, students noticed their new outlooks were drastically different than the ones they had originally projected for themselves. They were upbeat and optimistic about their lives in front of them. Their human capital was worth millions and thus made their worth much more valuable. To estimate your own “human capital, visit this human capital calculator: HC Calculator
What this meant for me
About a year ago, I took a position as a Business Development Manager for a credit union in South Carolina. Much of my position currently entails business-to-business relationships. Another part of it is providing financial education and literacy for our clients’ employees. I was a History major in college and a political operative by trade, so my knowledge on the matter when I took the job was minimal at best. Well, the more I researched and read articles and blogs, such as Get Rich Slowly, the more I learned that my financial behavior was in bad, bad shape.
I was borrowing more than what I was earning. A great portion of my pay was directed toward debts, such as loans and credit cards. And I felt that I had dug myself in a hole that I feared I would never get out of. There were some nights when I even felt paralyzed by the thought that I would forever be in debt.
As many people in this country have done, I read a friend’s copy of The Total Money Makeover by Dave Ramsey. While it hasn’t served as the complete outline for my financial recovery, it has served as the catalyst I needed to attack my debt and increase my net worth.
As many of you have done, I’m sure, I separated my assets and liabilities and had to catch my breath once I saw just how much (or how little) my net worth was. According to that basic personal balance sheet, I felt I was worth nothing. No. Nothing would have been a great place to start. I was worth less than nothing. Besides the determined motivation and an outline to tackle my debt, it was a pretty harrowing place to begin. But once I looked at Dr. Milevsky’s “human capital” exercise, I saw that not only would I get out of this financial pit, but I’d be acquiring assets for years and years to come that would benefit myself and my future family.
The bottom line is self worth can overcome your net worth. Once I saw my projected salary and income, I felt as if my fears were melting away. My human capital gave me that extra push to proclaim and now believe, “I will get out of debt. I will have security for my family and loved ones.” And perhaps more importantly, “I’m going to be okay.”
As in any exercise, there are variables that can affect one’s human capital (i.e. layoffs, getting fired, family tragedy, etc.), but the main point is that you are worth more than your debt. Yes, that mountain of liabilities can be pretty daunting, but knowing that you have the tools and the self confidence to succeed, you have your X-factor to achieve financial freedom and security.
Quotes and excerpts were taken from Dr. Mose A. Miilevsky’s Your Money Milestones: A Guide To Making The 9 Most Important Financial Decisions Of Your Life. You can find it on Amazon “used” for $2.57 or check it out at your local library (like I did!).