Singapore Entrepreneurs

Finally, Christopher Ng Wai Chung, the author of “Growing your tree of prosperity” has now released his second book “Harvesting the Seeds of Prosperity”. This book can now be found on sale at the World Book Fair’s Marketasia stall in Suntec City at about $22.90. In a special tribute, he has decided to spoil part of his latest book “Harvesting the Seeds of Prosperity” in the most intelligent Singaporean blogs in cyberspace. The book details his manifesto in reaching a state of Financial Nirvana, the ability to live within one’s investment income while still keeping day job to grow his portfolio even bigger. In this special post, he will share excerpts from his book, centering on the notion of human capital.

About the author: Christopher Ng Wai Chung, 32, is an IT Project manager who dabbles in personal finance and wealth management. His own blog can be found in treeofprosperity.blogspot.com. He can be reached at this email address.

In chapter 5, in a section on retirement planning and the CPF, we examine a radically new way of looking at Human Capital.

The Notion of Human Capital

Let us have a short discussion on a radically new definition of the concept of Human Capital.

We may well be in the cusps of a Copernican revolution in wealth management.

In the next 5 to 10 years, a lot of Finance PhDs will be crowned because of various inroads made into the concept of Human Capital. While this idea is still currently being refined and investigated by academics worldwide, it would do laymen and finance readers great benefit to gain a simple introduction to this idea.

Human Capital is defined as the present value of a person’s future labour income. It is how much you will earn for the rest of your life adjusted to present day dollars. Put in another way, Danny Phua, 25, a fresh graduate who has just recently earned his business degree from a local university, would have a much larger pool of Human Capital than his retiree father, who probably has much larger pool of Financial Capital. For the younger people, there is simply so much money which has yet to be made.

The latest idea in financial planning is that a person’s wealth does not simply consist of simply his assets minus his liabilities but should be conceptualised as a sum of two components – his Financial Capital and his Human Capital.

So why is this idea so important to the academics who dwell deep within their ivory towers?

It turns out that many PhD certificates given out to the most brilliant minds in finance will be based largely on the complex mathematical models that will be hatched to figure out how to quantify a person’s Human Capital which in turn can be used to determine how much insurance to have, what investments to buy and what kind of financial instruments to engineer.

Human Capital and the Five Pillars of Personal Finance

With an understanding of what Human Capital is, you can reduce your journey towards financial independence into five elements.

These five elements are earning, saving, protecting, investing and gifting.

Each of these elements requires specific know-how and people are generally strong in one or two of these skill-sets but lack the relevant competencies for the rest. For example, the specialist doctor that looks after your health is probably very good at earning his money, so-so at saving what he earns but absolutely terrible at investing because he chases the hottest stock tips given to him by his friends.

Let us now examine these aspects of personal finance further and explain the process in terms of the concept of Human Capital highlighted earlier.

i) Earning Your MoneyIf you have read preceding chapters in this book, Chapter 2 of this book discusses career management and catalogues the skill-sets that you will need to remain employed in the future.

From the framework presented earlier, your earning ability is represented mainly by the bulk of your Human Capital with a small income stream coming from your Financial Capital.

Studying hard to attain a better paying job, investing in your future through advanced degrees and certifications, retraining to keep yourself gainfully employed are acts of managing and growing your Human Capital. Actions such as those mentioned seldom have immediate effects on your income but may have a long-term positive effect on your career growth.

This is why those personal finance books which debase the value of a good education are simply sources of consolation to soothe the author’s inflated ego. Knowledge is power. Ignorance is always expensive over the long-term.

ii) Saving Your Money

Chapter 4 was written to explain how to track your expenses and save your money. When you control your budget well, you are, in essence, converting your Human Capital into Financial Capital.

How much you save can also be represented by how fast you convert Human Capital to Financial Capital which in turn provides passive income for your retirement.

iii) Protecting Your Money

In Chapter 6, we discuss insurance planning which is another way of preserving Human Capital. If death or disability occurs, insurance provides an immediate payout of Financial Capital which offsets your loss in Human Capital. Insurance can be seen as a financial security which provides Financial Capital upon the sudden degradation of Human Capital.

With this insight, you could design your insurance plan with the same care as you design your personal investment portfolio. For the experts, buying a Term Life insurance plan can be viewed as purchasing a Put Option (A Put Option is a financially engineered product which pays you an amount of money when another instrument loses its value) on your Human Capital assets.

iv) Investing Your Money

Chapter 7 discusses investing your money. If finding ways to earn more money is the same as growing your Human Capital, then investing your money is finding all sorts of ways to grow your Financial Capital. This is important because the proportion of Financial Capital that you have will grow with time. An important point to note is that as you grow older and save more money, investing your money can become more important than earning it.

There will come a point in time when managing your financial assets well is worth more than one more promotion within your company. This occurs when you have fewer good working years left but have a sizeable amount of personal assets.

With rampant ageism and sporadic corporate restructurings out there, it may come sooner than you think.

v) Gifting Your Money

The final stage of personal finance will be discussed in a future book. The act of gifting is the transfer of capital between an older person to his descendents in the form of wills or trusts.

Estate planning can be complicated but from the frame of reference of Financial or Human Capital transfer, it becomes simple. Gifting is an act of transferring, in the most efficient manner (taking into account estate taxes), capital from one party to another.

Rich people in the past had been transferring Financial Capital directly to their descendents and had seen much wealth go to waste because their descendents spent the rest of their lives whittling their inheritances away.

More savvy parents now see the wisdom of transforming their Financial Capital into their children’s Human Capital assets – putting their money into their children’s education and foregoing the transfer of material goods until their children develop the skills to look after themselves.

Clearly, the introduction of Human Capital creates a paradigm shift in the area of personal finance. Instead of focusing on investing your money or buying insurance to protect yourself, people can now think of ways to deal with insurance and investments holistically.

Related Links:
[1] This Evening In Mr Wang’s Life by Mr Wang reviews Christopher’s new book.
[2] Singaporean Pragmatism as he provides a glimpse another chapter in Intelligent Singaporean

No related posts.