Wealth equals Human Capital plus Financial Capital 

By Bob Peters || April 12, 2025

The Circle of Life and Work: Understanding Human and Financial Capital 

One of the top selling home video movies was the 1994 release of the original Lion King with tens of millions of sales.  The story taught children many life-lessons in character building.  In one scene, Mufasa (the Lion King) explains to his son (Simba) the circle of life where all living things depend on each other.  A lion eats an antelope, the lion dies and helps grasses grow which the antelope eats. 

Let’s zoom in on one slice of that circle—the life cycle of work, and how it shapes the way we build wealth. This cycle is rooted in two key forms of wealth: human capital (what we can earn) and financial capital (what we’ve saved). Understanding this balance is essential to building a financially sustainable life. 

Life Cycle of Work  

You are born, you grow into an adult, you pursue sustaining work, you work for many years, you stop working either by choice or circumstances, you live your remaining life without earning an income.  This is the life cycle of work and how earning income overlaps with your life span.

When you are no longer able or willing to earn income, your lifestyle will be determined by how much financial capital you have accumulated.  All your future earnings fall into the intangible bucket called human capital. Your future savings and investments fall into the tangible financial capital bucket. Once your human capital is exhausted, your lifestyle depends entirely on what your financial capital can support. 

What is the difference between Tangible and Intangible? 

To truly understand the value of our earnings and savings, we need to distinguish between two types of assets… tangible and intangible.  Tangible assets can be touched, seen and measured (i.e. valued.) Examples of tangible assets would include cash, savings, investments like publicly traded ETF’s/Mutual Funds/Stocks/Bonds/Real Estate.   

Intangible assets are more difficult to see and measure. Examples of intangible assets might include the patents or trademark of a popular brand like Coca Cola, Tesla, Apple.  How much is an intangible worth?  Well, if there were two identical phones and one said Apple and the other said Bob’s brand how much more would you be willing to spend on the Apple phone?  You get the point. Intangible assets can be very valuable. 

If you assume that an adult works approximately 40 years (some less, some more) then at the beginning of your career all 40 years of future earnings represent human capital.  If you had 100% certainty how much you might earn in each of the next 40 years you could measure this by discounting the future earnings back to a present value.  These future earnings would fall into the financial capital bucket.  Alas, none of us knows the future and this uncertainty forces us to throw future earnings into the intangible human capital bucket. 

How to grow your Human Capital 

You grow human capital by building knowledge and skills that the marketplace values—and that you can turn into income. The amount of earnings you can earn is based on a combination of factors both in and out of your control.  You can increase your education to a level where an employer would be willing to pay a higher salary.  You can develop specific skills and knowledge where the “marketplace” values these skills. 

What is out of your control is how the future will value your skills?  Because nobody has a crystal ball, we can’t see the future so we do the best that we can to learn and adapt. 

How to grow Financial Capital 

Growing your financial capital is straightforward.  Financial capital is accumulated by saving and investing over your lifetime.  You can increase your financial capital by increasing your human capital and choosing to increase your savings and investing attributable to your increased earnings. 

Financial capital can also be increased by starting the savings journey when you are young and can benefit from the wonderful benefits of compounding.  You can increase your financial capital by increasing future expected investment returns.  Future investment returns can be increased by diversifying your investments and understanding how differing asset classes (i.e. US Equities, International Equities, Government Debt Securities, Corporate Debt Securities, Cash) have different future expected returns. 

To illustrate how different asset classes generate different returns look at the table below.  In the first column is the asset class.  The second column refers to the ticker of a mutual fund that represents the asset class.  The third and fourth columns represent the actual compound annual growth rate (net of inflation) and the standard deviation, respectively. You can see that in the 40 years ending 2024 US Large Cap stocks performed the best with a CAGR of 8.6% while cash only generated .4%.  In other words, a $10,000 investment made in US Large Cap stocks would have grown to $271,139 while cash/Treasury Bills would have only grown to $11,731. 

Before leaving the table below check out the fourth and fifth columns.  Unlike the third and fourth columns that represent actual historical results, the fourth and fifth columns represent estimates of what each asset class might generate during the next 10 years.

The math behind these estimates is more complicated than is needed here but the concept is akin to mean reversion, which was described in more detail in the Nov 30, 2021, blog post, Reversion to the mean (and humility) really matters. Importantly, these future expected returns are not guaranteed but there has been rigorous academic research behind the methodologies used in such calculations.

If you agreed that the future expected returns highlighted in column four were intellectually solid which asset class might generate the highest CAGR over the next 10 years?  US Large Cap stocks…the winner of the prior 40 years OR Emerging Markets stocks?  Hint… look at the green highlighted text.

Importantly diversification amongst asset classes has proven to reduce risk.  It’s not as simple as putting all your eggs in one asset class that you think will generate higher future returns.  However, it may be a tool available to think about how to weight certain portions of your financial capital.

Historical Asset Class Returns 1985-2024, and Future Expected Returns 2024-2034   

Notes: 

-Future expected returns and std deviation from Research Affiliates. Data as of 3/31/25.  The asset classes are generally aligned with the Asset Class column.  There is no benchmark nor are the ticker symbols aligned with future expected returns.    

-All 1985-2024 data from themeasureofaplan.com.  Note:  Historical based on specific index mutual funds representing the asset class vs. future expected returns having no identified benchmarks.  

-All returns adjusted for actual and expected inflation (i.e. real returns)

Increase your Financial Capital by understanding how the human brain is wired 

Financial capital can also be increased by understanding how the human brain is wired for fear (selling when the market value drops…NO) and greed (buying the next hot investment out of FOMO…NO). 

If you were aware of the 9.1% drop in the S&P 500 between April 1, 2025, and April 8, 2025, and did not panic, you would have enjoyed the 9.52% increase on April 9th.  If you had sold, out of fear, before April 9th you would have incurred a permanent loss.  Conversely, if you had confidence that this 9.1% decline was short lived and invested more when the loss was at its greatest you would have done exceptionally well one day later.   

The story is not to suggest that you should “time” when to invest and when to sell.  Academic research has long proved that it’s not possible to “time the market.” Rather, understand that markets go up and down for reasons that nobody can predict with any reliable certainty.  You can win the game by staying the course over a long period of time. 

Is there more to consider than maximizing Human and Financial Capital 

Absolutely!  Life satisfaction comes in many more shapes and sizes than how much you earn.  Can we learn to wake up with a smile? Do we have friends and family we can express our concern for and extend unconditional love? Is there satisfaction in doing good for others?  Can you provide a random act of kindness to someone? 

The earnings that your human capital generates is not a reflection of your accomplishments as a human being. This is important to reflect on for a moment.  Human capital is “rewarded” by the marketplace with earnings but you, as a human, are not more or less superior based on your earnings. 

You need to decide what level of income you need to support the life that you want to live today and 40 years from now when you are no longer earning an income.  If you can’t earn an income pursuing a line of work that satisfies your vision of the future, then you might be well served to seek out knowledge and skills to help transition into a new area of employment. 

In search for a career. Shall I be a marine biologist? 

When I was young there was a very famous French marine biologist by the name of Jacques Cousteau.  Television had limited channels and there was no internet, so choices were limited.  Jacques Cousteau explored exotic oceans and sea life, and his narration was mesmerizing. 

My two top college picks were schools that had highly rated marine biology programs and I chose my school based, in large part, on the marine biology program.  After my freshman year I decided that I did not want to pursue marine biology. Why? 

I had learned more than I previously knew about the requisite amount of education (PhD), work-life balance (months away from home) and business model (always seeking grant money to fund research).  While I enjoyed school, I did not see myself committing to a PhD.  My future vision hoped to have a family and being away from family for months at a time did not appeal.  Lastly, I had PTSD from knocking door-to-door to sell raffle tickets as a fundraiser and continuously applying for grant money just did not sit well. 

When we are young, we are searching for what is the right career fit.  It often changes.  Enjoy the journey. 

How about being a swim coach? 

I finished my undergraduate degree in International Studies but was also drawn to a passion…coaching competitive swimming.  I had two opportunities after graduation; delivering mail in the international department of a bank in an entry level job that did not require a college degree OR become an assistant swim coach working for my club coach who had been an inspirational mentor to me.  I loved and had success coaching high school, summer swim league and year-round club teams while going to university.  Hands down the passion was there.  I chose the mail delivery job because I wanted to see where the career could lead. 

The mail delivery path was unknown, besides being low paying and not mentally stimulating I thought it might be possible to make something more satisfying if I gave it time, worked hard and proved to my superiors that they should give me more responsibility.  This path worked well for me due in part to what was in my control as well as good luck. 

Wealth equals Human Capital plus Financial Capital 

Wealth, not income, is the best measure of your future standard of living when your human capital declines and you no longer earn an income.  Wealth is a combination of the present value of intangible human capital which starts out large when you have ~40 years of future earnings and tangible financial capital which starts at low and grows over time as you save and invest. 

Sometimes we… do the best we can 

Sometimes we pursue passions. Sometimes we try the unknown and realize that we don’t want to go there. Sometimes we pursue the more challenging path.  There are no guarantees in life.  We try. Sometimes we succeed and sometimes we fail. Sometimes luck serves us well and sometimes it does not.  We can increase the probability of good outcomes by being prepared but we can’t guarantee good outcomes.  We try to do the best we can and maybe that’s a good place for now to leave the topic of human and financial capital.