Are You Your Biggest Investment?
December 19, 2010, By Tyler Newton 0 comments
If you ask the average guy what his biggest investment asset is, he would probably say his house or his 401(k). Chances are if that dad is less than 50, he has given the wrong answer. For most of us, our biggest financial asset is our career.
For example, a 40-year-old making $50,000 per year in a career of average risk who expects raises of 3 percent per year until he retires at 67 has a future career worth nearly $1,000,000 in current terms.
Valuing Your Career
There are five basic variables to determine the financial value of your career:
- What you make now
- What you expect to make at the end of your career
- How many years until you retire
- The benefits you receive
- Your level of career risk
Future Earnings. While you can’t control how much you make right now, with proper career management you can maximize your long-term earnings within the career you have chosen. (Have a life plan to manage your career with purpose.) You can also control how many more years you work (hopefully).
Benefits. We usually value the level of benefits when we evaluate a job. We understand the value of having good health insurance, paid vacations and other such perks. We may underestimate the value of retirement benefits like defined benefit pension plans and 401(k) match. On the other hand, many of us overestimate the value of stock options.
Career risk. Career risk is an underappreciated variable in career management and financial asset allocation. We men tend to underestimate risk, so we often trade the security of benefits or a steady job for a riskier job with a higher salary or stock options. Even worse, on top of taking risky jobs we then invest our savings in risky stocks in a vain attempt to chase big returns.
Your Career As an Investment
An asset allocation rule of thumb says the percentage of your portfolio that should be invested in bonds is equal to 100 minus your age. This rule of thumb treats your career like a bond. As we get older and have fewer working years remaining, we replace risky stocks with less-risky bonds.
This method ignores career risk, however. Some jobs, like a Wall Street trader or an option-rich but income-poor employee at a technology startup, are like stocks. If I have a stock-like job, I should invest mostly in bonds. Some jobs, like working at a benefit-rich large enterprise or for the government, are like bonds. If your job is like a bond, you can be comfortable investing more in stocks or borrowing money.
Some jobs are like stocks that are falling. If the stock market is betting that your industry is in terminal decline, it probably is and it’s probably time to switch careers.
Your career is an investment like any other. You need to maximize the reward while managing the risk. Only when you understand the value of your career can you understand how to invest the rest of your portfolio.
