Compound Your Human Capital To Financial Independence

Like many personal finance enthusiasts, I’ve been working hard toward the goal of financial independence and an early retirement.  That said, I’ve tried to balance out this goal with enjoying the process along the way.

One can spend countless hours and an enormous amount of life energy trying to optimize investments in an, all-to-often futile, attempt to ‘build a better mousetrap’.  The thing with trying to ‘beat the market’ and building a portfolio of individual stocks is that it takes a lot of time, effort and energy.  While it isn’t impossible to reach a goal with individual stocks, especially buying a basket of high quality dividend growth stocks, it may not be the best return on time invested!

Return on Time Invested is an interesting concept that has recently become more important to me.  We have a limited amount of human capital that we can spend in our lives. A finite period of time in which we can expect to use our knowledge and labour to earn money.  If one’s goal is to shorten that period of time even further by shooting for an early retirement, it is vitally important to make the most of your human capital.

Where To Spend Your Time and Energy

We know that the math behind reaching financial independence is “Shockingly Simple” from the famous Mr. Money Mustache post.  Here is the table outlining the savings rate required to reach financial independence at a particular time:Financial Independence savings rate

Assumptions made in the above chart:

  • You can earn 5% investment returns after inflation during your saving years
  • You’ll live off of the  “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
  • You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.
    • From: Mr. Money Mustache.

The question then becomes, what is the best course of action to grow the gap between household earning and household spending?

If you have already picked the low hanging fruit by cutting the fat and optimizing your household budget and paid off all of your debt (maybe you even paid off the mortgage) then you need to start looking at the income side of the equation.

Investing Human Capital & Time For The Most Return

Everyone’s situation is different, which is what makes personal finance ‘personal’ after all.  Just like we need to try to optimize our financial budget, we also need to optimize our ‘time budget’.

There are many ways to add additional income. We read a lot about active stock market investing, side hustles, starting business or even getting a second or third job.  Again everyone is in a different situation and has a different personality and appetite for risk. It’s up to each individual to figure out which path to additional income is right for them.

When I looked at my situation, my ‘spare’ time was becoming more and more limited. Our kids arrived and grew and it seems like there was just less and less time to devote to anything! I had to take a hard look at my situation and align my time and talents with my goal of financial independence.  Where could I spend my human capital to get the most return?

When I analyzed my life and the best use of my time and energy, I ended up realizing that I am very good at my career, but not as good when I don’t focus on it specifically. As you can tell by the updates to this blog, I had to make the decision to leave the blog, active investing, and my other side hustles alone to focus on my growing family and the upside potential my career offered.

When I was able to focus solely on my career and family for the last few years, it paid off handsomely. Yes, I was still trading my time for money, but my performance at work was exponential and I was promoted. Eventually, I was head hunted by another company where my base income increased by 30% and the bonus structure is much more aggressive. I’m currently working on some additional qualifications that will increase my potential compensation even more.

Again, this was my personal decision after assessing my risk averse personality and the opportunities available to me. Maybe active investing is a better fit for you, or maybe starting a business fits your personality? Whatever it is, there is no substitute for hustle and hard work!

Added: There is a great post over at Freedom 40 Plan about becoming an earning machine in your career. 

What About Dividend Growth Investing?

I saw the opportunity to make a lot more money by growing my career income in order to increase my savings rate vs. the incremental increased returns that my Dividend Growth Portfolio would over a passive investing strategy at this time in my life. I emphasize ‘at this time in my life’ because in my 30’s I still have a lot of human capital left and my earned income growth is still growing, so my contributions to my retirement account dwarf any current investment gains.

In order to focus on growing the gap between my household spend and income, I chose to take a passive investment strategy (Index ETFs and Dividend ETFs), with a stable of a few of my favorite dividend growth stocks still in the portfolio (RY and JNJ for example). By the way, the S&P 500 has been growing dividends at ~5-6%, so even a passive strategy allows you to grow your cash flow – albeit slowly.

I still think that Dividend Growth Investing is a viable strategy for anyone who has the time to invest in studying the particular stocks that are compounding their dividend and earnings growth faster than the overall market.  I plan on supplementing my passive portfolio with Dividend growers from time to time and converting at least 30-50% of the portfolio to individual dividend growth stocks once I have completed my last educational commitment and my earned income growth stalls.

So What’s The Plan?

The household is currently hovering around a 65% savings rate based on net income.  According to the chart above, if we were starting from Zero, we’d have about 10 years to go.  With out current investments, we could technically be financially independent in one more year on a bare bones budget, if we downsized our home to something more modest and we removed childcare from the expenses (Obviously, as we wouldn’t be working).

However, depending on what the markets do, we have about 3-5 years to reach FI on our optimal budget without downsizing and taking into account college costs for two children.

I still hope to squeeze out a moment or two to contribute here from time to time.

Thanks for reading and all the best in 2017!



  1. As for me, I don’t have much to invest yet. But the advice of my mentors is to invest regular amounts that I can afford in a consistent basis.

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