In what should the young invest?

Here is a great article by Michael Kitces that explores the economic concept of choices and how to better use limited resources.

He also uses the concepts I use of Human Capital and Financial Capital (which is a modern explanation of how we all take part in the global economy today … as opposed to the agrarian explanation of past centuries).

In what should the young invest?

Okay … so how would you advise a young person about the choice between: 1) investing in a (insert here: 401k, 403b, IRA, Roth), or 2) investing in a course to improve their skills? Remember, we are talking about a limited resource (discretionary income) so they need to choose.

This choice is really between which provides the greater lifetime outcome … invest in their human capital (skill improvement) which leads to even more income* … or invest in financial capital (a retirement savings plan). Early on, skill improvement has more potential so investing in skill improvement is more beneficial (assuming they can use those new skills; i.e., careful thought should go into this choice as well). Eventually though, skill improvement may peak out as far as the ability to generate increased income, and/or the time remaining to retirement may limit the growth of income potential.

Thus, at some point, the discretionary income should shift to financial capital so that the war chest may be built to sustain your Standard of Individual Living when you retire (human capital has been exhausted or diminished).


*Arguably, some of that increased income should be diverted to financial capital (savings for emergency reserves, education funding for their own children, and then retirement, etc). There is a balance that should be struck between the two. Often what happens is that the human capital earnings grow quite high and that high living standard becomes hard to change (living expenses have to be reduced in order to free up money to invest to grow the financial capital required to sustain that high living standard).

When you use a wealth perspective, how your worth may sustain your standard of living either while working (human capital) or retired (financial capital), then retirement planning is simply a date along the spectrum we call life.

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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