When we think about personal finance, we tend to focus on our financial capital – assets we own like a house, savings accounts, or retirement plans. And we focus less on our human capital, or the ability to earn income over our lifetime.

We know it’s important to diversify your financial assets. Putting all your money into real estate or a single company’s stock can be a risky proposition.  But it’s also important to think about how intertwined your financial and personal capital are and what you can do to diversify the two.

There are a couple scenarios where this is particularly important:

1. You have a large amount of equity compensation or shares of your employer’s stock.

When a significant amount of your savings is held in your employer’s stock, your financial and human capital are all riding on your company doing well. An easy way to diversify is to immediately sell your company’s stock when your equity compensation awards vest. Just be sure you understand any tax implications.

If you decide to hold some of your company’s stock, make sure it’s not an amount that could throw all of your long term goals off track if the company doesn’t do as well as you expect.

2. You are a business owner.

If you’re a business owner, you likely have a big portion of your financial and human capital tied up in your business. In this case, diversification might not be an option, which means you need to be especially careful about managing risk and protecting your earning power. There are three specific things that come to mind:

• Emergency savings – be sure that you have enough saved to weather any ups and downs in your income, especially if you know your business income can fluctuate significantly.
• Disability insurance – this is important for everyone, but especially if you own a business that would need to stop operating if you were unable to work.
• Life insurance – life insurance is critical – and especially if you have personally invested money into your business. If something happened to you, not only would your family lose your future earning power, but some of your financial capital may be lost if the business can’t go on without you.

Joe Calvetti is a CPA and the founder of Still River Financial Planning, a comprehensive, fee-only financial planning firm that specializes in working with young families and professionals. Click here to learn more about how we work with clients.

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Disclaimer: The information provided above is for educational purposes only and should not be considered financial, legal, or tax advice. You should consult with a professional for advice specific to your situation.