Many of us are still reflecting on the challenges of 2020, but the dawn of a new year provides an opportunity for a fresh start.
While thinking about your relationships, health, and career, it’s also a good time to assess your financial situation. Think about how your money is working for you and map out what you want to achieve in 2021 and beyond.
Your equity compensation can play an important role in building this personalized financial roadmap. Strategically using your proceeds may make it possible for you to meet certain milestones sooner, or provide more flexibility for your long-term plans. Here’s a four-step guide to using your equity compensation to help you achieve your financial goals.
Step 1: Take stock, financially
Whether you experienced financial difficulty or were able to save more due to all the changes brought about by 2020, the first step in building your plan for 2021 is to get a clear picture of your financial health. In addition to your income, assets, and debt, don’t forget to review your equity compensation. This type of compensation may take several forms, including 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 have vest in 2021;
- Stock purchases you have made in previous years and/or will make through an ESPP in 2021;
- Stock options that will expire in 2021.
This inventory gives you the basic information you need to build the foundation of your plan (you can reach out to your employer if you have questions as you complete it!). As you review, you may decide that certain moves make sense for your situation, such as purchasing additional stock through your ESPP, or exercising your vesting stock options across various price points in the year ahead to benefit from rising prices while also protecting against downside risk.
Step 2: Refresh your spending budget
Next, create a spending plan that addresses your immediate needs with an eye toward your future. Your budget especially merits an update if you tapped your savings to get through tough times or made significant changes to your spending habits while sticking close to home. One popular approach is to follow the “50-30-20 Rule,” allocating:
- 50% of your budget to needs, such as mortgage or rent payments, groceries, clothing, etc.;
- 30% to wants, such as entertainment, vacations, gadgets, or other extras; and
- 20% to saving, investing, and paying down debt.
As you create your plan, don’t forget to include estimated equity proceeds as part of your annual income.
Step 3: Document (or revisit) your goals
Once you understand your immediate financial circumstances and needs, you can look toward the financial horizon. Write down your goals in light of today’s income and expenses, as well as where you’d like to be tomorrow. Typically, goals 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 use equity compensation in some or all of your plans. For example, after thinking about 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’ 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 plan.
Step 4: Create a goal-based plan
As you solidify your goals, think about how much money, or liquidity, you’ll need to turn them into realities. Your priorities may shift the percentage of income you devote to your various obligations. For example:
Francesca was a corporate events coordinator before she was furloughed. She used her credit cards and emergency fund to cover expenses while she wasn’t working. Now that she’s back to work, she’s shifting an additional 12% 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 job as creative director for a marketing agency is now remote. He is using the savings on his commuting expenses to increase his 401(k) retirement contributions by 1% per year over the next three years. He also plans to purchase additional company shares through his company’s ESPP.
The bottom line
As you approach 2021 with fresh eyes, think about your financial goals for today and tomorrow, build a plan for how to reach them, and give careful consideration to how your equity proceeds can support your aspirations. If you do decide to sell some of your equity compensation, be sure to consult your tax advisor so you can plan for the tax impact.
Our team of Financial Advisors at Morgan Stanley Virtual Advisor is here to help. Schedule a conversation with us so that we can support you on your financial journey.