Last Updated: November 30, 2009
When it comes to building a financial plan, more and more people are starting to factor in their human capital — their careers. After all, your career just might be the largest asset you have, larger than your house and retirement accounts. At least, that is the case when you're in your 20s, 30s and 40s.
What's the best way to factor your career into your financial plan?
"The first step is to set up a career asset working capital fund," said FPA member Michael Haubrich, CFP®, of Financial Service Group, Inc.
According to Haubrich, a Conventional Ammunition Working Capital Fund (CAWCF) is a separate account from your emergency cash reserve. "This does not mean the funds cannot be pooled together, rather the amount needs to be considered separately — one based on three- to six-months living expenses and the other based on other factors," he said.
Haubrich said the amount in your CAWCF will vary based on something he calls "career velocity." That's the number of job changes you expect and volatility — the variance of pay over time. "In order to properly diversify your portfolio (including your financial and human capital), both the velocity (how often you change jobs) and the volatility (how much your income fluctuates) of your career need to be examined," he said.
"Working capital for the career asset has three parts — funding skill set maintenance and development (lifelong learning), funding job changes and funding career sabbaticals," Haubrich said. "The working capital for your career asset should be viewed separately from your personal or family emergency cash reserves."
"The costs of skill set maintenance and development would be primarily reflected as an expense on the income statement or budget," he said. "However, there should also be an amount in the working capital reserve to fund an unforeseen need to develop career skills. The appropriate amount would be determined based on the nature of your career."
"The second part of the working capital fund is funding job changes," Haubrich said. According to a recent study reported by Monster.com, the average number of weeks between jobs for workers under age 50 is 17 weeks. Over age 50 and the number of weeks of unemployment grows to 22. The Department of Labor's Bureau of Labor Statistics predicts that the average number of job changes for a young worker today is nine. "Add these two studies together and it is obvious that a fund for job change costs is a necessary part of a personal financial plan," Haubrich said.
According to Haubrich, the last element of the CAWCF is the cost of a career sabbatical. "Career sabbaticals are necessary for career rehabilitation and family or personal transitions that extend from three months on up to a few years," he said.
A financial planner can help you determine the amount that should be in your CAWCF, as well as how it should be invested. For his part, Haubrich recommends this investment strategy: "Not all the funds need to be held in cash since much of the fund is based on future events and contingencies," he said. "Some cash is necessary — the amount for career maintenance and development and any contingencies less than two years. For the longer term items, such as sabbaticals and [Family and Medical Leave Act] FMLA, using fixed income and lines of credit are more appropriate."
But as with many things related to financial planning, he said rules of thumb often don't apply. "Each case needs to be considered based on the facts and circumstances," Haubrich said.
Find a financial planner who can help you factor your human capital into your financial plan.