By Jane Mepham
Hundreds of articles have been written this year on ways to recession-proof your finances – from establishing a big emergency fund, to paying down debt, and to diversifying your portfolio. This is excellent advice that should work for a lot of people but I’m not sure it will do the job permanently.
Invest In Yourself
Instead, I’m going to propose investing in yourself as a way to recession-proof your financial future and possibly your whole retirement.
Warren Buffet once said, “The best investment you can make is in yourself.”
It’s the whole idea of improving your individual human capital for higher future productivity; and it’s something I encourage people to consider every day. Yes, you need to save for retirement and all the other things you hope to do in the future, but you should also focus on improving yourself for a higher return in the future.
We all have a chance to improve our human capital, and nobody, including a bad market, can take that away.
Investopedia defines human capital as the economic value of a worker’s experience and skills. The same article continues on to describe this as including assets like education, training, intelligence, skills, and other aspects valued by employers.
Nobel prize winners and economists Gary Becker and Theodore Schultz differentiated between general and specific human capital.
General human capital is training or education that benefits only the individual at any company, versus that which is specific to one company.
You have an opportunity to improve your own general human capital by taking specific training, taking part in different experiences, becoming more self-disciplined, and hanging out with people that will influence you positively.
Some of this will cost money, which you could invest in the market instead.
This brings to mind something I once heard Michael Kitces of the famous Nerd Eye View Blog discuss so eloquently on a podcast. It’s the idea of improving yourself in a way that pays off long-term versus putting that money in the market.
Here is a great example:
John is 25 years old. He has $ 6,000 that he can put into his Roth account this year. Over 10 years at a standard 6% growth rate, this will grow to about $ 9,000. Let’s consider another option – John goes back to school and completes a 6-month programming certificate program he’s been eyeing. The new technical skills learned from the program allows him to move to the next job level, giving him a pay increase of 10% instead of the predicted 2022 increase of 3.4%.
It comes down to weighing the long-term compounding effect of spending money on yourself versus investing it in the market.
John has lost the opportunity of the 6% growth rate, but he’s gained a higher income and, in the future, his raises (assuming he stays in that job) will be based on a higher base salary.
It’s also possible that he’s gained new skill sets that make him more valuable to the company than the guy next door. It’s an open secret that companies will retain employees who bring more to the table when it comes to skills.
Practical Steps to Invest in Yourself Instead of the Market
- Create an emergency fund, ideally six months worth of reserves. If you are foreign-born, with an overseas family you may need to see on an emergency basis, your fund should include return tickets for you and your whole family.
- Take an honest assessment of your skill sets and identify gaps. There are a couple of ways to do this:
- If employed, check in with your manager and find out what skill set you need to move to the next level.
- Look at job postings to figure out skills in demand and chat with others in the industry for an inside look.
- Figure out what soft skills you need, not only to succeed at your job but to move to the next level or the next job (maybe at a different company). Be willing to take feedback on this.
3. Identify the best experience and the cost to give you the skill set you need.
There are endless ways of gaining new skill sets. A few that come to mind are formal classes, travel experiences, starting new side hustles, etc. Figure out what will give you the skills you need and do the math.
It’s also important to figure out the opportunity cost of not investing this money in the market, for it to make mathematical sense.
To be intentional I’m limiting the investment to about $ 6,000 per year, which is the current Roth IRA max contribution in 2022.
4. Go get your training.
If you follow these steps over a couple of years to become organized and intentional, you have a chance to recession-proof your financial future.
About the author: Jane Mepham
Jane Mepham is the founder & principal advisor at Elgon Financial Advisors, a registered investment advisor in the state of Texas.
She enjoys simplifying the complexities of the US financial system for immigrants and foreign-born families, including those on work visas. She loves working with her clients to map out a personal strategy that addresses all areas of their financial lives (budgets, college planning, insurance, retirement, tax planning, investing, etc.) allowing them to take full advantage of the opportunities available and avoid key financial mistakes that could derail their American dreams.