Continuing with the theme of “tax season time crunch” comes another 1-minute read. The in-depth 2-minute version of TGIF 2 Minutes will return soon.
Amidst tax season, questions can come to mind:
- WHY do we work so hard to pay so much in taxes?
- Why am I not on a beach somewhere getting “more” out of life?
- What is the “right” balance or timing around working now/spending later or spending now/working later, especially in light of all the taxes we pay?
There are too many answers to these simple yet complex questions. Given the 1-minute time frame of this Friday morning read, simplicity rules. Please consider the concept of human capital in order to apply a common aspect to all three questions above.
Human capital is a resource that literally every human being possesses. In some ways, even the smallest of children possess human capital and “produce” something including joy, camaraderie and an effect on the people and world around them.
More to the point of working, tax paying, adult Americans, this part of human capital involves an “intangible asset that drives problem-solving [and] wealth creation.”* In other words, human capital is the value of expected future cash flows related to labor earnings. Note the word, future.
Human capital provides working people with a future – and a reason to hope, dream and set goals. To apply the concept of human capital to the three questions above,
- Taxes are paid today and for the foreseeable future, based on an amount of human capital that includes current earnings – as some kind of guarantee of a future, hopefully with certain benefits (social security, healthcare, freedom as we know it)
- A permanent beach vacation takes an inestimable amount of human capital; therefore, it makes sense to take (and pay for) a beach vacation with a defined time frame allowing the “more in life” to come later (exactly when is up to each individual or family) after human capital has accumulated in large amounts of savings and investments.
- A balance between working and spending can be achieved after at least several (if not far more) years of earning, saving, investing and growing monies earned. Human capital is what is needed to create the balance – with decades of lead time needed.
Does any of this discussion make paying taxes any easier? Probably not. BUT – human capital, in certain amounts of future earning potential, can allow more risk to be taken today in order to make the future beach vacation a reality. And this last point is the quantitative reason why human capital must be taken seriously in financial planning.
*Merriam-webster.com, investopedia.com.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.