Many people think that money is their most valuable asset. In fact, there is another asset that is often overlooked, namely, themselves. In the financial world, this asset is known as human capital. Although it may seem different from financial capital, the two are closely interconnected. Understanding the relationship between human capital and financial capital is key to building a sound long-term financial strategy.

What is Human Capital? 

Human capital refers to a person’s productive capacity, that is, the amount of value they can create through their time and effort over the course of their working life. This asset is inherent to the individual; it cannot be transferred but can be developed. Here are some components of human capital:

• Health and energy: physical and mental health that underpin long-term productivity.
• Knowledge and expertise: technical skills and soft skills relevant to one’s career field and aligned with future aspirations.
• Network and reputation: professional connections that can open up career opportunities and collaborations.
• Mindset and habits: a growth mindset and disciplined habits that determine how quickly a person develops.

What is Financial Capital?

If human capital is likened to a machine, then income such as salaries, bonuses, and business profits is the output of that machine. Financial capital is the portion of that output that is successfully saved and grown, that is, the collection of financial assets we own, such as savings, time deposits, Mutual Funds, Stocks, Bonds, and real estate.

The larger one’s financial capital, the greater the potential for passive income, such as interest, coupons, and dividends. This means that throughout our lives, we are actually converting human capital into financial capital through work, saving, and investing. 

Employees vs entrepreneurs: Different incomes, different strategies 

The way human capital is converted into financial capital is also influenced by the nature of each person’s income. Interestingly, this income pattern can be likened to an investment instrument.

Employees: human capital similar to Bonds

• The monthly salary employees receive makes their income relatively stable and predictable, much like Bonds that pay coupons periodically.
• Since their living expenses are covered by their salary, employees do not need to sell their investments when the market is volatile. This is why employees have greater flexibility to invest in growth instruments such as Stocks.
• However, employees still need to set aside an emergency fund, at least three times their monthly expenses for single individuals and six times their monthly expenses for those with families or dependents.

Entrepreneurs/freelancers: human capital similar to Stocks

• The income of entrepreneurs/freelancers tends to fluctuate and is difficult to predict, much like Stocks prices that go up and down.
• Therefore, their portfolio needs to be balanced with more liquid, stable, and low-risk instruments, so that there are always funds available that can be liquidated without having to sell assets at an inopportune time.
• In addition, the portfolio should also include income-generating instruments that provide a steady cash flow during specific periods to help cover expenses.
• Furthermore, entrepreneurs and freelancers should set aside a larger emergency fund, at least six times their monthly expenses for single individuals and 12 times their monthly expenses for those with families or dependents.

Understanding the three categories of investment instruments: growth, income, dan liquidity

Before discussing strategies for each life stage, first familiarize yourself with the three categories of investment instruments used in portfolio allocation:

*SBR and ST cannot be traded on the secondary market and can only be redeemed early during specific periods, making them less suitable for needs requiring immediate access to funds.

The role of human capital and financial capital at various life stages

The composition of human capital and financial capital changes over time. The age ranges below are indicative and may vary from person to person. 

Before starting to invest, make sure you have an emergency fund in place. This fund should be kept separate and is not included in the portfolio breakdown below. For entrepreneurs and freelancers, consider shifting about 10–20% of the growth allocation to income or liquidity. The following is a general overview for employees:

Stage 1 – Early Career (approx. 20–30 years)

Human capital: high, Financial capital: low

• Human capital dominates because it is the primary form of capital at the beginning of one’s career.
• Financial capital is still low because one’s career has just begun.
• Steps for human capital: improve your skills through training, certification, or continuing education, and start building a professional network.
• Steps for financial capital: build an emergency fund, then regularly set aside a portion of your income for growth instruments with long-term potential.

Stage 2 – Career Peak (approx. 30–45 years)

Human capital: high, Financial capital: moderate

• Income continues to grow as it approaches its peak.
• Financial capital also grows due to higher income and returns from investments.
• Steps for human capital: develop leadership skills and maintain good health to sustain productivity.
• Steps for financial capital: continue to make growth instruments the largest portion of your portfolio, but begin adding income and liquidity instruments to balance risk.

Stage 3 – Approaching Retirement (approx. 45–55 years)

Human capital: high, Financial capital: high

• Human capital reaches its peak.
• Financial capital should ideally be large enough to begin serving as the primary source of income.
• Steps for human capital: prepare for the transition to retirement.
• Steps for financial capital: shift the majority of the portfolio to instruments with lower volatility. Keep a portion invested in growth assets to help combat inflation, as retirement can last 20 years or more.

Stage 4 – Retirement (age 55 and older)

Human capital: low · Financial capital: high

• Human capital declines, and active income from work becomes minimal or may cease altogether.
• Financial capital becomes the primary source for covering living expenses, supplemented by pension income.
• Steps for human capital: maintain good health, as healthcare costs are among the largest expenses in old age.
• Steps for financial capital: shift the focus from accumulating assets to preserving their value and gradually drawing down on them. The liquidity portion helps meet routine expenses without having to sell other assets when prices are falling.

Keep Human Capital Protected

During our productive years, human capital is our greatest asset. However, this asset can be lost in an instant due to illness, an accident, or death. Therefore, protect your human capital with:

• Life insurance, to provide financial protection for family members or others who depend on your income.
• Health insurance, to help cover the costs of medical treatment and hospital care, in accordance with the benefits stated in the policy.
• Critical illness insurance, to provide financial protection upon diagnosis of a critical illness, helping to meet financial needs during recovery.

In Summary

Ultimately, human capital and financial capital are two sides of the same coin. Develop and protect human capital to support continued income growth, then consistently set aside a portion of that income to build financial capital. This way, when the ability to work begins to decline, financial capital can serve as a source of income to support living expenses.

Disclaimer: The portfolio composition in this article is for illustrative purposes only and does not constitute personal investment advice. Adjust it according to individual risk profiles, financial goals, and circumstances. Investing in mutual funds involves risks. Before deciding to invest, prospective investors must read and understand the prospectus. Past performance is not indicative of future results.