I always say in my training programs that people are worth more than what they think. In fact, the average able-bodied person is a multi-millionaire.
The acronym SAL-N (statement of assets, liabilities and net worth) was only recently thrust in to the limelight even though government employees have long been required to submit their SAL-N on an annual basis. The SAL-N is a great tool for effectively determining the financial starting point of any person, whether he is a government or private sector employee.
Not surprisingly, the SAL-N is applicable even to newborn babies. How? Babies’ net worth would be equivalent to the only assets they have: namely their body, mind and soul. Babies would not and could not have debt. To grow assets, parents just infuse capital into the net worth of their kids to correspondingly grow the latter’s assets.
Though the SAL-N will be a bit more complex for an able-bodied working adult, the basic formula remains: assets = debts + net worth.
In constructing the SAL-N, I ask my training participants to list down and total the market value of their assets and the prepayment values of their debts. The difference between the two is simply their net worth. Sometimes, however, my participants get discouraged when they see that their net worth is not all that large. In fact, with some, their net worth is negative.
But you see, a person’s worth can never be negative, both philosophically and financially. Why? The traditional method for constructing net worth is to consider physical and financial assets. One type of asset, however, is commonly left out. And that is human capital.
My definition of human capital is the present worth of an individual’s future earnings. The formula that I use is as follows: (Warning: the following image may cause nausea!)
Please note that the formula above will not work if r and g are equal to each other. But there is a way around this if you really think your income will just grow by the rate of inflation. Since we are dealing with mere approximations, just add a very small number to either r or g (e.g. 0.00001%) and the formula should still work. Now if you want a more precise calculation, you can lay out the computations on a spreadsheet.
So let’s assume a person who is 40 years old with another 20 productive years left in him, an annual income of Php500,000 growing at 5% p.a. and an inflation rate of 4% p.a. The present value of this person’s human capital would roughly be Php10.5 million. He would be a multi-millionaire just by human capital alone.
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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