Definition
Human Capital
Human capital is the present value of all the income you can expect to earn over your working life — effectively your biggest financial asset when you are young.
Early in a career, your wealth is mostly human capital (future earning power) and little financial capital. As you work and invest, human capital steadily converts into financial capital. This framing has practical consequences: a young person with stable, bond-like income (a secure salary) can afford a more equity-heavy portfolio, because their human capital is the 'safe' part of their balance sheet.
It also explains why protecting income matters so much — term life insurance and disability cover essentially insure your human capital. Investing in skills, education and health raises this asset, often with a higher return than any market investment, especially early in life.
Related terms
- Asset AllocationAsset allocation is the decision of how to divide your portfolio among major asset classes — such as equity, debt, gold and cash — based on your goals, horizon and risk tolerance.
- Life-Cycle InvestingLife-cycle investing is the idea of adjusting your asset allocation and risk over the course of your life, taking more risk when young and less as you age.
- Term InsuranceTerm insurance is pure life cover that pays your family a large sum if you die during the policy term, in exchange for a low premium.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.