Ask people what “Financial Freedom” means to them and you’ll get many different answers.
To some, the term may be about living a life free of debt, or being able to outlive one’s investments/savings, or being able to afford certain luxuries on impulse, or having a lot more control over one’s time and activities.
There are two aspects that unite all such perspectives:
1) Being able to live the best possible life that one has imagined and,
2) Financial freedom is dependent on one’s net worth – total personal assets minus personal liabilities.
In fact, a lot of us who turn to self-employment do so to achieve our desired level of financial freedom by gaining more control over the means to increase our net worth.
Yet, this ideal of achieving financial freedom sometimes becomes elusive to some self-employed people as we get into the realities of our daily work. As entrepreneurs, small business owners, or independent professionals or freelancers, we may find ourselves working harder and longer hours without the commensurate financial returns over the longer-term. And, thus, we may find ourselves second-guessing our motivations and approaches, especially when things are not going too well. This phenomena is so prevalent, actually, that it is not restricted to just self-employed people. I know a lot of corporate career folks who have found themselves in this dilemma.
A Different Way of Thinking
Recently, I started reading Moshe Milevsky’s book, Your Money Milestones. In it, he has written about human capital as a key element of total net worth – an economic theory that has roots as far back as Adam Smith in the 1700s. It continues to be debated, refined and used today, both in macro-economic and micro-economic senses. Milevsky argues that human capital can and should be a quantified element of one’s total net worth, going as far as to say that it is the largest and most valuable asset class for most people over most of their lifetimes.
The general definition of human capital includes all the competencies, knowledge, social and personality attributes that allow us to create economic / financial value. Some of these elements – like specific competencies / skills and formal education / training – are quantifiable by calculating the present value of future cash flows from paid labor or employment that leverages them. Others – like our social and personality attributes, relationships and networks – are, of course, more intangible (although, there are some schools of thought that are provide ROI models for these too).
Regardless of the many debates surrounding how much quantifiable value human capital really adds to a person’s total net worth, there is one thing that almost all economists and financial experts agree on:
While personal financial capital can fluctuate and even diminish based on economic cycles (as the recent financial crisis has proved), human capital can continue to appreciate cumulatively over long periods with the appropriate investments in intellectual and emotional knowledge and physical health / longevity. At a macro-economic level, this understanding and development of human capital drives the economic growth of nations and corporations.
So, What Does This Mean for the Small Business Owner, Entrepreneur, Freelancer or Independent Professional?
Here are some of my takeaways:
- As we work to build our businesses, we need to focus on increasing our personal human capital and not just material capital to ensure that our enterprises and, thus, our net worth grows. This means an ongoing investment in knowledge, health, relationships, networks, life experiences, etc., that add to our human capital.
- The risks of not developing our personal human capital will eventually manifest themselves through mistakes, rework, inadequate management / analysis of information, suboptimal client interactions, client loss, stress, frustration, etc., which impact our profitability and growth.
- In today’s rapidly-evolving and highly-competitive times, with the associated up-down economic cycles, focusing on and building the right kind of human capital to increase our total net worth over the longer term is a must for all – self-employed or not.
What Do You Think?
Do you agree with this definition of human capital? As a small business owner or independent professional or freelancer, how are you working purposefully to grow your human capital on a daily basis? What recommendations do you have for others based on what has worked for you?
[Note: I will write more on this topic as I continue through Milevsky’s books.]
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