By: AnnaMarie Mock, CFP®
Growing up, my parents instilled two philosophies in me; to always live below my means and save for the future. Those simple words of wisdom resonated with me and unknowingly shaped my personal and professional life. Through my parents’ guidance, anytime I’d get a cash gift, I’d put some away in savings (i.e., my very secure piggy bank) and spend the rest on myself (i.e., probably on candy or something of the sort).
As I got older, the piggy bank turned into a proper savings account, but my discipline of always saving a portion didn’t waver. Years later, my teenage self realized I had accumulated a good chunk of change! The years of saving paid off literally because I unintentionally had enough for my first car.
Reflecting on that, I now ask myself, “For what purpose was I saving the money? Was it a happy coincidence I had enough for a car, and would it have been a better outcome if I started investing the savings instead?”
The ideology of saving and planning does not develop overnight. It takes time to cultivate and evolves as your life changes.
Let’s fast forward to adulthood responsibilities and finances. The ‘gift’ in my story can be equated to awarded employer equity compensation, like RSUs, ISOs, and NQSOs.
It can be tempting to leave equity compensation on autopilot because the rules are so convoluted, you don’t have time to research, or there is no immediate need for the proceeds. Just like teenage Anna, you forget about your assets.
However, it is vital to take a strategic approach to regularly review your benefits and incorporate them into the broader financial plan to make the most out of your benefits, even if it is easier not to act.
So, how can someone harness employer compensation to add the most value to their lives?
Typically, an individual has a pool of assets without any end game in mind or has a litany of goals without knowing how to fund them.
Start with a Goal
Starting with goal setting will inspire you to make your goals a reality. Setting goals trigger new behaviors and momentum to implement and make financial progress.
Identify. Formulate a vision in your mind about what you want to accomplish and put those thoughts on paper to map out how you want your life to look. There are no right or wrong answers. Make the goals clear and specific to eliminate vagueness and disjointedness when executing. Your goals should be ambitious but also attainable to motivate without causing stress.
Examples of Goals
Quantify. How much do you think this goal will cost? Some plans like retirement will not have a finite amount compared to a vacation you want to take two years from now.
Solidify. Create a plan to turn these dreams into reality by balancing the funding needed for your goals with the need to live today. This step incorporates understanding your current cash flow and the available assets. Available assets can include cash savings, investment accounts, and equity compensation. For shorter-term goals, liquidity is critical to minimize the need to utilize debt compared to a long-term goal.
Equity compensation is part of total compensation and, if treated correctly, can be the resources needed to fund the goals.
Include Equity Compensation in Your Overall Financial Plan
Equity compensation should never be looked at in isolation because it is a valuable part of the bigger picture. To do so, you need to understand how the stock options work because knowing what you have and how it will be taxed will help you determine how to make the most of your equity compensation:
Vesting: How often will the shares become available to me (vest), and how many units will I obtain?
Industry Insights: Comparing your company to the broader industry is not always an indication of what’s ahead, but it can gauge trends that may impact your business and, ultimately, stock price.
Taxation of Benefits: You want to focus on what you keep, not what you make. Each type of equity compensation has different tax rules. Taxes are inevitable, so don’t let tax avoidance drive your decisions. To reduce the possibility of a tax surprise, plan for taxes from the start.
Concentration: Concentration in one stock can expose you to excessive risk and significantly impact the total balance if there are fluctuations. Say your investable net worth is $1,000,000, and the company stock price drops by 20%. When the concentrated stock is only 5% of your investable net worth, the decline is only 1% of your total assets rather than 5% when the concentration is 25%.
What if you don’t need the money for short-term goals? Long-term investing in a diversified portfolio can be appropriate if there is no immediate purpose for the funds.
As you weigh the options, you want to consider your outlook for the company stock and broader markets in conjunction with your financial goals and the timeline for achieving them.
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.