Wednesday, October 20, 2010

Your Other Portfolio - Part 1

You have two portfolios that generate returns:  financial assets and career assets.

You start your career with a large asset composed of potential future earnings.  The more tangible skills you acquire the more that asset grows.  Our economy says those with specialized training in medicine, engineering and law have the highest potential future earnings but clearly anyone that builds skills that are valuable increases potential value of this earning ‘asset’.

Over time you do work and get paid for it – in other words, your career asset is monetized:  turned into tangible earnings.  If you are wise, some of that money is invested and transformed into capital assets – you retirement portfolio, equity in your home which (theoretically, at least) will grow over the course of your career.  One of the fundamental jobs of a financial planner is to make sure that you keep enough of the money generated by your career asset, each year, to eventually support you in retirement (to make work optional rather than necessary) and to pay for your other goals and objectives. 

We call this savings and investing, but it's really a process of gradually turning your career asset into capital assets, so that when you decide to retire, and your career asset has been consumed, it's replaced by the ever-growing capital assets in your investment portfolio.  Tragically, millions of people never retain enough of the money generated by their career asset (never save enough) to make work optional later in life.

Your career asset is usually far more stable than the stock market; when the markets go down, you still go to work; when the markets go up, you're still earning the same income.  But as millions have found out in the recent economic downturn, your career, too, can be affected by upheavals in the economy.  When somebody is laid off, it interrupts the cash flow from the career asset, and raises a lot of "career asset management issues" that probably should have been considered all along:

Do you work in a stable, growing industry or profession? 

Do you regularly reevaluate your skills and value in the marketplace? 

When does it make sense to change jobs or careers, or get retraining? 

Will taking time out from work and paying for college courses or specialized training pay off for you? 

What free skill building opportunities can you take advantage of? 

Other issues make much more sense once you think about your career as an asset.  Life insurance is just a way to protect the future value of your career asset.  So is disability insurance.  Typically, the amount of life insurance you hold should go down over time as the value of the career asset you need to protect declines.  At the same time, the amount of disability insurance probably should rise as  you reach the later years of your career when you earn the most and are at greatest risk from disability.

People who can't wait to retire early because they're miserable in their present job may need to think about their career asset differently.  Their solution may not be early retirement but either a renegotiation of the current job (less responsibility, less stress, less income) or a career change to something much more satisfying.  As more of your career asset is monetized, as work becomes more and more optional, a lot of people are looking for a more fun way to generate income.  We call it "helping people shift from a great-paying crappy job to a crappy-paying great job"--something they would enjoy doing for many years.

With fulfilling, meaningful work, suddenly, your work-life is extended, putting less stress on the retirement portfolio, putting more fun in your life and adding years to your career asset.  Your work life is better, your personal life is better and you financial future is assured:  the holy grail of financial planning. 

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