Let Your Equity Compensation Help You Reach Financial Goals

As you develop a tailored financial roadmap to pursue your goals, equity compensation can be a significant component. By strategically managing your proceeds, you may be able to reach short and mid-term milestones faster, while providing more flexibility for your long-term plans.  Here are four steps to consider when using your equity compensation to help you achieve your financial goals. 

Step 1: Take Stock, Financially

The first step to consider when building your plan is to get a clear picture of your overall financial situation. In addition to your income, assets and debts, don’t forget to review your equity compensation. Company equity may take several forms, such as stock options, restricted stock units (RSUs), or shares purchased via an employee stock purchase plan (ESPP). Pay close attention to:

• Stock options or RSUs you expect to receive or vest in the near future;

 

• Stock purchases you have made in previous years and/or will soon make through an ESPP;

 

• Stock options that will expire within the year.

 

As you complete this inventory, you can reach out to your employer if you have questions specific to your equity compensation. After reviewing your details, you may decide to take actions like buying more shares through your company's ESPP or exercising your stock options at different price points throughout the year to help take advantage of potential price increases while also managing downside risk. 

Step 2: Refresh or Build Your Budget

With the information you gathered in Step 1, you may want to consider updating or creating a budget that addresses your immediate needs while also keeping an eye toward the future. While everyone’s budget looks a bit different, it can be helpful to plan within a framework. One approach is to follow the “50-30-20 Rule,” allocating:

• 50% of your budget to needs, such as housing payments, groceries, clothing, etc.;

 

• 30% to wants, such as entertainment, vacations, gadgets or other extras; and

 

• 20% to savings, investments and debt repayments.

 

As you build or refresh your budget, remember to include any estimated equity proceeds as part of your annual income. 

Step 3: Document or Revisit Your Goals

Once you understand your immediate circumstances and needs, you may want to look toward the financial horizon. This can include writing down your goals in light of today’s income and expenses as well as where you’d like to be tomorrow. Such goals may fall into one of three categories: short-term, medium-term and long-term. It’s common to have multiple goals across all three types. 

Visualizing what you want in the future can help you crystalize your next steps as well as how you’ll factor your equity compensation into some or all of your plans. For example, after considering your goals, you may decide to:

• Exercise and sell stock options to pay off high-interest debt or make more than the minimum payment on a mortgage or student loan;

 

• Use proceeds from ESPP stock sales to ensure you have at least three to six months’ worth of living expenses in an emergency fund, or to pay for a big expense like a wedding;

 

• Hold the RSUs you’ve received to use as part of your long-term retirement planning. 

 

Step 4: Create a Goal-centered Financial Plan

As you solidify your goals, consider how much available cash, or liquidity, you’ll need to turn them into realities. Your priorities may shift the percentage of income you devote to your various obligations. Let’s see how this might work for two hypothetical savers and investors:

• Francesca was laid off for several months but recently found a new job. She used her credit cards and emergency fund to cover expenses while she was unemployed. Now that she’s back to work, she’s shifting an additional 12 percent from her “wants” budget to pay down her most expensive high-interest credit card debt, help cover the taxes on the company stock she sold, and rebuild her emergency fund.

 

• Jim’s company decided to let all employees work remotely. He is using the savings on his commuting expenses to increase his 401(k) retirement contributions by 1 percent per year over the next three years. He also plans to purchase additional shares of company stock through the ESPP. 

 

The Bottom Line

As you think about your financial goals for today and tomorrow—and build a plan for how to reach them—you may want to think about how your equity proceeds can support your aspirations. If you do decide to sell some of your equity compensation, consider consulting with a financial advisor for help getting started and be sure to consult your tax professional so you can plan for the tax impact.