How I Manage Money after Receiving a Graduate Degree in Economics

Your human capital > every other asset in life

Economists look at money like a robot programmed for optimization.

That leads to two frustrating truths:

1. Economics can teach us so much about managing money and;
2. Economists are only interested in impressing other economists who speak their language.

You add those two truths together, and you get a wasted opportunity.

We tune these stuffy academics out in favor of some TikToker who has no clue what they are talking about because economists aren’t interested in speaking to us.

Luckily, I have spent my entire adult life studying economics. So, I am here to translate economic speak into simple, actionable steps to help you treat money like an economist would; a problem to solve.

#1 — Realize that your career is a multi-million asset

When you are young and “broke,” it’s easy to feel discouraged.

But if you are in debt or struggling to build financial wealth, take this economic lesson to heart:

If you’re young and “broke,” realize you are as wealthy as a 65-year old multi-millionaire.

You may not have financial capital like stocks or cash, but you have what economists would call “human capital.”

Your human capital refers to the income you earn throughout your career.

Your career is the most important asset you’ll ever own. Your human capital spits out a dividend on every payday. The more paychecks you have left until retirement, the more valuable your human capital is today.

If you’re 25 and plan on working until 65, you have as many as 1,040 paychecks left to collect in your life. Your human capital is worth millions more than the 64-year-old who’s retiring next year.

#2 — Take a small piece of your human capital and reinvest it into financial capital

There is a simple formula you must solve to build wealth.

Income > expenses.

If the income you generate using your human capital is greater than what you spend, you have a surplus. If you reinvest that surplus into assets that are likely to appreciate in value, then you will build financial capital.

This is key because managing money like an economist means realizing your human capital depletes as you age (fewer paychecks left), and you need to replace that human capital with financial capital.

But what to invest your surplus in to build your financial capital?

#3 — When investing, think about your human capital

What I’m about to share with you is pretty deep in the weeds of “econ-talk,” but it’s too important not to talk about.

Let’s start by defining how an economist would define your “total wealth.”

Total wealth=human capital + financial capital.

You want your total portfolio of wealth balanced between stocks and bonds.

• Stocks to provide growth.
• Bonds to provide income and stability.

When you’re young, you have no financial capital, only human capital.

So, the question you need to ask yourself is this:

Does my human capital look more like a stock or a bond?

• If you have high job security and a regular paycheck every two weeks, your human capital will look like a bond.
• If you run a business or work a 100% commission job, your income has limitless growth potential but will be highly volatile. In this case, your human capital would look like a stock.

Remember, you want to balance out your total portfolio of wealth between stocks and bonds.

That means:

• If your human capital looks like a bond, you should invest more of your financial capital in stocks. This provides the growth potential that your secure 9–5 paycheck can’t.
• If your human capital looks like a stock, you should invest more of your financial capital in bonds. This provides stability and income during the low periods where your not making any money.

#4 — If you’re young, you should be heavily invested in stocks

All else being equal, the younger you are, the more you should have invested in stocks because you’re not living off your financial capital. You’re living off your human capital.

If you have a risky job, you should be more conservative than someone with high job security. But the point remains, the more years you have until retirement, the more aggressive you can afford to be in your investments.

Of course, keep some liquidity in the form of an emergency fund to tide you over during periods when your income declines.

#5 — As your human capital declines, your portfolio needs to become more conservative

If you have spent your younger years investing your surplus cash flow, you should be building a large pile of financial capital, concentrated in high-risk, high-reward assets like stocks.

As you get closer to retirement, your human capital begins to decline and eventually approaches $0 when you stop working. As your human capital declines, an economist would tell you to start diversifying your financial capital into less risky assets like bonds.

By the time you retire, you may have some pension income or government benefits, but mostly, you’ll be living off your financial capital.

During retirement, if you’re heavily invested in stocks, a market crash could be devastating.

Why?

Because you have no more paychecks coming in, that means to pay the bills, you need to sell some of your stocks which just took a beating. Withdrawing from a portfolio during a market crash is how many retirees run out of money.

The takeaway

Economists hate unnecessary risk.

Throughout your life, your total wealth is equal to your human capital + financial capital. Having a diversified portfolio of stocks and bonds allows you to benefit from growth while maintaining stability and a baseline of income.

An economist would always advise that you take the least amount of risk required to achieve your financial goals. It’s why they like boring, unpopular financial products like annuities.

There’s a time to lean into the growth provided by stocks and a time to take risk off the table and pay the bills using bond-like income.

Want more articles that simplify investing? Read this list of curated articles, Or pick up a copy of my book, The Rational Investor.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.