I began my career as a young sales manager in the hospitality industry and earned an annual salary of $26,000. Little did I know at the time that my human capital – as in, the present value of my expected future income throughout my working lifetime – would be worth nearly $3,000,000!

I recently did some back-of-the-napkin calculations and was surprised to learn that I had already earned $1.4 million dollars over an 18-year career. I found that incredible, given that I had never earned a six-figure salary and, my wages had been stagnant for several years.

Projecting my income forward using a modest 3% annual growth rate revealed the potential to earn another ~$1.6 million by the time I turn 55.

Human Capital vs. Financial Capital

Put in different terms, however, and you can see that my human capital is shrinking each year. That’s because the value of my human capital peaked the day I started my career (back in 2003) with my entire lifetime of earnings ahead of me. Since then I’ve steadily used up my earning power and the value of my human capital has gradually declined.

The idea of eroding capital doesn’t sit well with me, but that’s where the second form of wealth building – your financial capital – comes into play. See, I’ve been a diligent saver for most of my career, which means converting my human capital (earnings) into financial capital (investments).

Now at the age of 41, I’ve managed to turn $1.4 million of human capital into long-term savings, or financial capital, of nearly $700,000 (ignoring the equity in our home).

I can estimate my financial capital into the future by adding my annual savings rate and multiplying it by the expected rate of return on my investments. So when I do that projection I add annual savings of $18,000 to my existing financial capital and multiply that by an expected 6% return on investment. The result?

By age 55 I’ll have converted $3 million worth of human capital into more than $1.8 million in financial capital.

Interestingly, the two forms of wealth building don’t intersect until age 48 – the point when I’ll have about $1M worth of human capital left (assuming age 55 retirement) and my financial capital eclipses the $1.1M mark.

Is Your Career a Stock or a Bond?

Another way to look at the concept of human capital vs. financial capital is to determine the volatility of your career. A teacher or civil servant likely has rock-solid job security and a relatively known earnings schedule throughout their working lifetime. Their human capital could be considered more bond-like, meaning they can likely afford to invest more of their financial capital in riskier assets like stocks.

Contrast this with someone that works in a boom-or-bust industry like oil & gas, or whose income relies mainly on commissions and bonuses. Their human capital could be considered more stock-like and therefore they can ill-afford to take on much risk in their financial capital and should hold more cash and guaranteed investments to hedge against a volatile profession.

You also can’t discuss human capital without talking about protecting your lifetime earnings with disability insurance, whether that’s through your employer, a private plan, or some combination of the two. One-third of working Canadians will experience a period of disability lasting longer than 90 days during their working lives.

Final thoughts

The concept of human capital is interesting when you consider your lifetime earnings and how to convert that into financial capital to fund your retirement years.

You begin your career with perhaps several million in human capital and likely nothing in financial capital. The goal is for the two to intersect at some point during your working life, hopefully early enough so that your financial capital can provide you with your desired lifestyle in retirement.

$3 million sounds like a LOT of money to earn in a lifetime. But here’s the thing: if you don’t convert even a small portion of your earnings into financial capital then your human capital will eventually run out and you’ll end up with nothing.

As Charles Dickens once said,

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”

The internet was all atwitter about the stock market this week, more specifically about the performance of GameStop stock, short-selling, hedge funds, and Robinhood (a free stock trading app in the U.S.). Financial journalists, pundits, and amateur investors all offered their hot takes on this ‘Reddit-fuelled’ market frenzy. My inbox also lit up with friends and blog readers wondering just what the heck was going on.

Many of these explainers were bad or flat-out wrong – a reminder that not everyone needs to have an opinion on the news of the day. The GameStop story is a fun distraction from the mundane stay-at-home routine. The stock is up 8000% over the last six months, causing short-selling hedge funds to take a huge bath on their trade.

Meanwhile, passive investors like me watch from the sideline with great amusement.

Passive investors spent more time today making their morning toast than worrying about an individual stock

— Ramit Sethi (@ramit) January 28, 2021

Rob Carrick summed up the story nicely when he said:

“But if you’re wondering what the GameStop story means to your future investing, the answer is nothing. Enjoy the show – but don’t take notes.”

If you’re simply curious about what exactly happened with GameStop stock and how it affected Wall Street hedge funds who were betting against the company, watch Preet Banerjee’s excellent explainer on the GameStop short squeeze:

And what exactly is Robinhood’s role in the GameStop saga? Vox explains why the popular stock trading app restricted trading on GameStop, Blackberry, AMC, and other supposed ‘meme-stocks’. Robinhood now faces a class-action lawsuit saying it manipulated the market by restricting trades.

Think the GameStop short-squeeze is the greatest ever? Not even close. Of Dollars and Data blogger Nick Magguilli tells the story of Piggly Wiggly and how one man took on Wall Street all alone.

Wealthsimple Trade

Here in Canada, our only zero-commission trading platform is Wealthsimple Trade. They took a different approach than Robinhood – rather than gamifying stock and option trading (only to restrict those trades due to ‘volatility concerns’), Wealthsimple allowed its users to trade GameStop and other meme stocks freely.

They sent out an education email with a useful explainer and warning about trading volatile stocks. They also included pop-up warnings to users through the app when they searched for GameStop and other volatile stocks.

Wealthsimple Trade became the number one app on Apple’s App Store this week as the company saw a 50% increase in sign-ups. My Wealthsimple Trade review was the number one visited article on the blog this week.

This Week’s Recap:

No new posts from me here this week as I caught up on financial planning work and freelance writing projects.

I’ve also changed email delivery providers, so if you subscribe and receive new posts by email please double-check that this article was delivered to your inbox on Saturday. If you want to join 10,000+ email subscribers and get notified whenever I get around to publishing a new article, you can enter your email in the subscription box located at the top-right of the website.

Over on Young & Thrifty I shared the best blue-chip stocks to buy in 2021.

From the archives: So you’ve made an RRSP contribution. Now what?

Promo of the Week:

I’ll beat this drum again – stop parking your cash in your big bank chequing or savings account. You can find decent high interest savings at online banks and credit unions.

Here’s the biggest no-brainer move to make with your emergency fund money right now. The big banks pay nothing on your savings deposits. EQ Bank’s Savings Plus Account consistently offers an everyday high interest rate at or near the top of the market (currently 1.5%) with no hassles. Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.

Weekend Reading:

Believe it or not there were other, non-GameStop related articles published this week. Here’s what I was reading:

Erica Alini explains how the pandemic housing craze is fuelling another boom – reverse mortgages:

“Many borrowers take out a reverse mortgage loan to pay off other debts, a strategy that allows them to eliminate debt repayments and free up some cash flow. Seniors have also traditionally used these loans to provide a regular, tax-free income supplement.

But in recent months, Ziomecki says she’s noticed an increase in the number of applicants who want to borrow against their home to help their children or grandchildren get into the real estate market.”

Jason Heath says TFSAs may be a no-brainer but don’t fall into the trap of neglecting your RRSP.

Here’s Millionaire Teacher Andrew Hallam on why you might not want a higher paying job. Couldn’t agree more.

Academic research on thematic ETFs shows their average returns underperform the market by about 4% per year.

Here’s Squawkfox Kerry Taylor on opportunity costs and trade-offs:

My Own Advisor Mark Seed and Findependence Hub’s Jon Chevreau discuss whether you should speculate with your retirement portfolio. 

Can a rule of thumb be a short-cut to financial well-being? Morningstar research explores how financial rules of thumb can help or hold back investors.

Rewards Canada’s Patrick Sojka explains why earning 5x points with one credit card isn’t the same as earning 5x points with another credit card. It’s all about the earn and the burn.

Michael James on Money shares a good review of Ramit Sethi’s book, I Will Teach You To Be Rich. I used to find Ramit’s approach to be off-putting but I’ve mostly come around.

Life expectancy is one of the greatest unknowns in retirement planning. Jason Heath offers strategies for both a long and short retirement.

Finally, here’s a cool story from a local Lethbridge entrepreneur who is building a luxury playhouse cottage resort in Alberta’s Crowsnest Pass.

Have a great weekend, everyone!

The deadline to contribute to your RRSP for the 2020 tax year is just over a month away (March 1, 2021). Now is a great time to take advantage of any unused RRSP contribution room and reduce your net income (and tax burden) for 2020.

Remember, your RRSP deduction limit is determined by:

• Your unused RRSP deduction room at the end of the preceding year, plus;
• The lessor of 18% of your earned income in the previous year, or the annual RRSP limit ($27,230 in 2020)

When in doubt, check your CRA My Account.

I’ve already maxed out my RRSP deduction limit for 2020, but in previous years when I was catching up on unused room I’d use the first 60 days of the year to take stock of my tax situation and then make an RRSP contribution to bring any taxes owning down to zero (or close to).

Here are some other lesser known RRSP tax tips to consider:

1.) An RRSP Loan

It’s a good rule of thumb to make regular RRSP contributions throughout the year. But an RRSP loan can be useful to boost your retirement savings, catch up on available contribution room, and reduce your tax burden (particularly if you take the ‘first 60 days’ approach to maximizing your tax planning).

The basic idea is to take out an RRSP loan from your bank at interest rates that closely resemble home equity line of credit rates (2.95% – 3.95% these days), make your RRSP contribution, and then pay back the loan over a short-period of time (3-6 months) with your tax refund and other cash flow.

2.) Reduce Tax Deductions at Source

Making an RRSP contribution is simply one of the best strategies for high income earners to build retirement savings and reduce their tax burden. Managing your cash flow can be an issue, though. That’s because you don’t realize the tax savings until you file your taxes the following year. 

That’s where the form T1213 Request to Reduce Tax Deductions at Source comes into play. Fill out the form and indicate how much you plan to contribute to your RRSP this year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year.

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file.

3.) Pension Income Tax Credit

The pension income amount allows you to claim a non-refundable tax credit on up to $2,000 of eligible pension income. If you are over the age of 65 you can create your own qualified pension income to take advantage of the pension income tax credit.

What you can do is transfer a small amount – say, $12,000 – from your RRSP into a RRIF at age 65. This allows you to withdraw $2,000 from your RRIF each year for six years and claim the pension income amount. 

This Week’s Recap:

In my latest instalment of the Money Bag I answered reader questions about investing in cryptocurrency, selling stocks at a loss, and comparing your finances to others.

Speaking of investing in cryptocurrency, I shared my thoughts in this Global News piece by Erica Alini about whether Bitcoin belongs in your investment portfolio.

Over on the Young & Thrifty blog I explained how to invest in IPO stocks.

From the archives: So you’ve made your RRSP contribution. Now what?

Promo of the Week:

The message in that post from the archives is about the second step after contributing to your RRSP or TFSA account. Yes, I’m talking about actually investing the contribution.

More and more readers (and my fee-only planning clients) are choosing to self-direct their investments at Questrade. It’s not rocket-science by any means, especially if you use a single-ticket asset allocation ETF, but you still need to know how to execute a trade on the platform. Here’s how to do it using the Vanguard Balanced ETF (VBAL):

1. Log in to your Questrade account
2. Click on the green ‘Trade’ button at the top right of the screen
3. Under the ‘Order Entry’ window on the right hand side, enter the ETF symbol (VBAL)

That screen will look like this:

• Look at the ‘ask’ price. You’re going to place a ‘Limit Order’ at one penny above the ‘ask’ price.
• Now confirm the amount of money you have in cash that you want to use to make this purchase (i.e. $10,000)
• Divide the amount of cash by the ‘Limit Order’ price. So, in the example above, it’s $10,000 divided by $28.90 = 346.02 shares.
• Round that number down to the nearest even number, so 346 shares.
• Enter that number where it says ‘Quantity’.
• Confirm which account type you’re making the trade in (RRSP, TFSA).
• Click the green ‘Buy’ button.
• Confirm the trade.

That’s all there is to it! Open a Questrade account and you’ll get $50 in trading commission rebates (ETF purchases are free, but selling costs $4.95 per trade).

Weekend Reading:

Our friends at Credit Card Genius look at which credit card has the best return on spending in Canada.

ETF sales outpaced mutual fund sales in Canada last year ($41.5B to $31B), but in terms of total assets under management ETFs still lag far behind mutual funds.

Jim Yih at the Retire Happy blog has all the financial planning numbers you need to know for 2021.

My Own Advisor blogger Mark Seed looks at the pros and cons of taking a salary or dividends from your corporation. This is a challenge I’m still wrestling with today.

Here’s an interesting discussion on Reddit from an insider about the problems with the financial advice industry. I don’t necessarily agree with the amount of time it takes to on-board new clients, but the rest of the comment and discussion is certainly worth a read.

Michael James on Money reports his investment returns for 2020. I like that he includes the 20% of his portfolio now held in savings accounts, GICs, and short-term bonds, which obviously brings down the overall return but reflects the reality of a retiree living off his savings.

A really smart post by Millionaire Teacher Andrew Hallam on stock market solutions to irrational exuberance:

“When it comes to investing, anything can happen. Stocks will often be priced far higher than they should. But nobody can see the future. That’s why investors shouldn’t speculate. They should maintain a diversified low-cost portfolio of U.S. stocks, developed international stocks, emerging market stocks and bonds.”

Canadian Couch Potato blogger Dan Bortolotti reports the 2020 investment returns of his couch potato model portfolios.

Justin Bender, Dan’s PWL Capital partner in crime, shares the 2020 asset allocation ETF returns from Vanguard and iShares:

Rob Carrick says the epic failure of online brokers’ mishandling of call volume in 2020 could drive away their most valued clients – well-off retirees.

A Wealth of Common Sense blogger Ben Carlson looks at markets that are definitely not in a bubble, namely value stocks, emerging markets, European stocks, and Japanese stocks.

Here’s an interview with Ben Carlson on the Humble Dollar blog about his new book, Everything You Need to Know About Saving for Retirement.

Finally, why Canada should allow joint tax filing for spouses rather than taxing individuals.

Have a great weekend, everyone!