Welcome to the 10th edition of the Tech Financial Planning (TFP) Newsletter.
Back in August, I had a 1:1 call with a new client who reached out because she just got a new job with a big increase in total compensation.
Emily (not her real name), is a product marketer at a large tech company and is set to earn just over $400,000 this year.
In this newsletter we will break down the 3 challenges Emily was facing and how we solved them together.
TL;DR
Sell vested RSU’s to create a cash bucket
Set aside money for additional taxes
Automate the surplus
Current Situation
Like we mentioned, Emily took a new job and her total compensation went up significantly.
Here’s the breakdown:
Emily’s Income - up to $410,000
Base Salary: $180,000
Bonus: Up to 25% of salary (up to $45,000)
Annual RSU Award: Up to $125,000
New Hire RSU Award: $180,000 over 3 years ($60,000 / year)
After meeting with Emily, 3 major challenges began to emerge.
Here’s what they were, and how we fixed them together.
Challenge 1: Big expenses in the next 3 years
In the next 3 years, Emily is expecting to buy a car and her first house.
She doesn’t need the newest, nicest car.
But she would like to be able to put down a decent chunk of cash to keep her debt and monthly payments low.
Emily lives in Southern California, so a house will be much more expensive than the national average.
Her target is $1.5M - $1.8M.
She expects to go 50-50 with her spouse (they currently have separate finances, that may change in the future).
If we take the higher end and use a traditional 20% down payment of $1.8M ($360,000), Emily’s portion will be $180,000.
Between the two, we are looking at an additional $200k+ in known expenses in the next few years.
Solution 1: Sell RSUs as they vest to create her cash bucket
We will view her RSUs as a cash bonus and sell them as quickly as possible once they vest (depending on open trading windows).
With the leftover amount (not used for taxes), we will set that aside in her cash bucket.
Because we have significant known expenses in the next 3 years, we don’t want to get cute and invest that money aggressively.
Yes, we could miss out on some upside, but with such a short time frame, it’s more important to protect against any downside.
We don’t want her to miss out on her dream home because she was trying to time the market.
We will put the remaining cash into a high yield savings account or short term treasuries to get some better yield on her cash.
She should be able to make a few thousand dollars a year while keeping her money safe.
Over 3 years, she should have $300,000 set aside, which should be more than enough for her needs.
Challenge 2: Her company won’t withhold enough in taxes
Specifically on her vested RSUs - here’s why.
Emily is in the 35% tax bracket, but her company is only withholding 22% on her vested RSUs.
Which means she will have to make up that 13% difference come tax time.
In Emily’s case, that means that could be an extra $24,050.
Her employer withholds 22% at vesting = $40,700
Tax due is at 35% = $64,750
Potential taxes still owed = $24,050
I don’t know about you, but finding out you owe $24,000 on April 15 doesn’t sound like a fun surprise to me.
Solution 2: Set aside taxes during the year
Because we know her company won’t take out enough, we want to get ahead of it.
There’s 2 main options:
Each quarter, we can set aside a portion of her vested RSUs to pay the additional taxes.
For simple math, she would need to set aside and pay $6,000.
$24,000 tax liability / 4 quarters = $6,000 each quarter.
An alternative would be to increase her withholdings on her salary.
This means the company would take out more in taxes each paycheck to offset the fact that not enough is being taken out from the RSUs.
The advantage here is that once you set it up, there’s less work to do.
+1 for automation.
The disadvantage is you have less money each paycheck.
-1 for regular cash flow
Candidly, I’m fine with either option, because either are better than closing your eyes until April 15 and seeing what you owe
Challenge 3: Make the most of every dollar
Ok, this one is more of an opportunity than a challenge.
Something that’s big for Emily is to make the most of every dollar.
She’s on a great path right now, and she spends well below her means.
But she wants to make sure she’s doing everything she can to set her and her family up for financial success.
Solution 3: Automate the surplus
Currently, Emily is maxing out her 401k and putting $1,000 a month into her brokerage account.
But even with selling her RSUs and putting it in a cash bucket, she has a big surplus.
About $25,000.
We have a few different options, but we decided to first max out her company ESPP.
Because her company offers a 15% discount she can put in $21,250, but receive $25,000 worth of stock.
And it comes with a lookback.
So when she sells it when she receives it, she has a minimum gain of $3,750.
Not bad.
That leaves just over $3,000 (see cash flow diagram).
We will put that into her brokerage account by increasing her monthly contributions.
$1,000 a month becomes $1,250 a month
In the future, we will look at doing a Backdoor Roth, HSA, and other investment opportunities (e.g. private real estate).
But for right now we wanted to keep it really simple
Putting It All together
At the conclusion of our call, Emily had a tangible plan for her money to make the most of every dollar, while setting herself up to buy a house and car in the next few years.
You’ll notice that we didn’t get into the weeds on every spending category.
The vast majority of my clients don’t need me to tell them if they should spend $500 or $600 on groceries.
Or if they should get a latte from Starbucks or not.
The goal is to make sure we are saving and investing appropriately, in line with our dreams.
Results:
Minimal effort - she will need to sign up for her ESPP (one time), increase her automatic contributions to her brokerage account (one time), and sell /transfer her RSUs / ESPP as she receives them (15 minutes each quarter)
Bases covered - We are saving for the short term (RSUs to cash for house + car) and investing for the medium (ESPP and brokerage) and long (401k) term.
Simple - no crazy strategies that put her at risk. Emily has a busy life, and this plan fits well
Mission accomplished.
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