After all these steps on cutting expenses, building up savings and investing to build a pension, it can become easy to dismiss any investing in yourself at all, especially in your intellectual abilities as a professional.
You might have got to a point where you’ve got all your daily costs taken care of: you’ve got a good, solid budget that you are happy with and able to stick to, you have short-term savings goals set up that you contribute to monthly such as a holiday or a new laptop and you even have your long-term savings on track in the form of pensions, paying off your mortgage and / or investing in the stock market.
When you get to this point it becomes easy to get completely taken up by this popular personal finance motto:
Earn more, reduce your spending, invest the difference.
And whilst there is nothing wrong on paper with the above guideline, it is easy to get a little too distracted by this, to become too frugal and forget what else is important in life. In step 75 we looked at how spending a little on yourself every now and again is important to not forget the importance of “YOU” and to make space in your budget to reward or treat yourself.
But what about your intellectual or professional development? When you get too sucked up by financial independence, be careful not to overlook the importance of individual capital and the need to invest in this aspect of yourself, over putting the money into more investing or savings.
So what am I really talking about here with investing in individual capital? Your individual capital are the unique skills, talent, creativity, wisdom and experience that you possess and that you use to create, perform, produce etc.
It’s important to invest in your individual capital for three reasons:
- It can be fun, entertaining and can occupy or challenge you.
- It increases your earning potential.
- It helps with the compounded learning effect.
The first reason is fairly self-explanatory, but we will look at the other reasons in a little detail below.
Increase your earning potential
Contrast the following two scenarios:
- An employee with a stable job, earning €24,000 a year manages to live off €18,000 a year save and invest €6,000 per year. He does a good job, stays in his job and gets a 3% pay raise every year. Of every pay rise he adds half directly to his savings, and allows himself the other half to live off – to combat the effects of inflation and add to his regular expenses. 10 years later his earnings are now €32,254 a year, of which he saves €10,127.
- An employee with the same job, earning €24,000 a year, living off €19,000 a year (€1,000 extra) and saving and investing €5,000. Why the extra €1,000? This employee spends roughly €1,000 per year investing in himself: courses, seminars, books, workshops… The first two years nothing happens (she gets the same 3% pay raise every year), but then her superiors quickly notice she’s got a lot more talent and potential, so they give her a promotion after the 2nd year with a 15% pay rise. She keeps investing €1,000 in herself a year and after each 2nd year she gets a 15% pay rise and promotion. This cycle continues until after another 10 years her earnings are now €44,809 of which she saves €15,403.
Big difference by just investing in yourself right? Of course, the second person started with saving “only” €5,000 a year instead of the €6,000 the first person was doing. But guess how much money they had both set aside ten years down the line (not including inflation or returns)? The 1st person set aside €84,694 whereas person two managed to put away €99,205! So even though she started with less, she quickly caught up and surpassed the first person.
My example is a little extreme, as you can easily invest in yourself without spending €1,000 per year! You could save a lot more than what I suggest above by spending less than €1,000 a year and having more money left over to save and invest.
The compounding effects of learning
Investing in yourself abides to the same laws of compounding: with every new thing you learn over time this keeps building up more and quicker. Think of it in the following way: Imagine you stand in a big open field and you throw a ball in a straight line. The ball rolls in a perfectly straight line and comes to an end at the far end of the field. Now you take a second ball and instead of throwing the second ball exactly after the first, you adjust the angle by just 1% to the left of right and then throw it in a straight line. This ball also comes to an end at the end of the field, but does it end up just 1% to the side of the first ball? Of course it doesn’t as the ball has been going in that different direction for the entire distance. So it ends up at quite a distance from the first. Now imagine you had a third ball. Like the second ball you give it a 1% adjustment, but unlike the second ball you are now also able to give an additional 1% adjustment. Imagine where that ball would end up!
Learning works in exactly the same ways: the more you adjust, the bigger the difference over time as you go slightly more off course each time. You can use this to your advantage and become the expert in your professional area, become the top performer in your company or whatever else you aspire. Develop your skills or knowledge and it will give you more confidence and experience to implement them, more practice means you’ll perfect your skills more and the better you become the more you’ll want to learn and become better.
Step 83 – Invest in your Individual Capital – in detail:
- Think about courses and training that provide you with new skills. These courses don’t have to be full post-grad or MBA courses (especially not if you consider how expensive these often are!), they can be courses that cost far less and might take up a lot less time, yet can provide you with valuable new skills that you can use in your professional career. This can include courses such as a writing course, a course on computer skills or public presenting. It can also be brushing up another language, management course or attending webinars on improving customer experience or online marketing.
- The advantage of doing courses is that you often get some type of diploma or certificate to confirm that you’ve completed the course. That doesn’t mean you couldn’t also look at other options to invest in your individual capital. Browse the internet for more ideas on how to develop your skills. Think about things such as:
- Books and articles
- Seminars and workshops
- Investing in yourself doesn’t have to be just related to your job. You might want to set up a side hustle to generate income so maybe you can do a course, read a book or attend a conference on setting up your blog, selling online, writing a book or website design. Write down some areas that you would like to become better at or learn more about.
- Set aside a yearly amount in your budget to invest in yourself: find that money in your budget and determine on a yearly plan to use that money in the best way possible.
- If you get worked up about the money it costs you, think of it like this: imagine you invest $1,000 now to do a course and that it leads to a promotion with an accompanying $10,000 annual increase in your annual wages. If you’ve still got 30 years of working years ahead of you, that promotion alone will amount to an extra $300,000!
I am sure there are many different areas that might be applicable to you and that will help you increase your future earning potential, be that in your current career, one that you are considering switching to or even for your side hustle. The key is finding an area that you feel motivated about and that you think will help you increase your earnings over time.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.