Human Capital: Increase Income, Lower Risk

Human capital is becoming more and more important to your personal finances.  This is the case because new products rely on what is referred to as “Merit-Based financing.” It is particularly critical for recent graduates who usually have little to no work experience or financial assets. What they have, however, is the potential for future earnings and the ability to manage these earnings wisely.

Today, Merit-Based financing uses human capital primarily to qualify young individuals for financing educational and personal loans.  Specifically, companies are mining data to answer questions such as: “what have you done to increase your income potential and at the same time lower the risk to your future earnings?”

Let’s examine the potential impact of human capital and why continuing to develop it matters:

In this example, we will assume that Jane and Sally are both physical therapists. They went to the same school, have the same work experience, and both work at the same private practice. They are the same in every single aspect except one.  Sally decided to pursue a residency and later completed her fellowship while Jane did neither.

Since Sally has dedicated the time to further develop her human capital by continuing her studies, she is of more value to the private practice relative to Jane.  Sally would be better skilled and more qualified to perform her job.  The private practice can also now advertise and attract clients based on the notion that their physical therapists have better credentials than its competitors.  Therefore, Sally creates more value for her employer, which increases the probability of higher pay and less risk of losing her job relative to Jane.

Therefore, using Merit-Based financing, Sally would get better terms on her loans and financing needs because she would be considered less risky from a financial underwriting perspective.  With this in mind, if both Sally and Jane applied to refinance their student loans with a FitBUX Income Share Agreement (ISA), all else equal, Sally’s Payment Rate (the percentage of her income necessary to fulfill her FitBUX ISA) would be lower than Jane’s. By furthering her education and training, Sally has increased her earnings potential and at the same time lowered the risk of those earnings.

You can always take steps to build your human capital.  This is especially true while you are still pursuing your education.  Things like learning a new language, joining and leading groups, and volunteering are just a handful of things you can do that require nothing but an investment of your time…and that investment will pay off in the future.

If there is a finance topic you would like us to write about, please let us know by dropping us a note here.  If you are a physical therapist, check out our new online community designed By PTs for PTs. As always, please share this article with your friends…

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