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Welcome to the 29th edition of the Tech Financial Planning (TFP) newsletter.
Over the past 3 years I’ve met with hundreds of tech professionals, and I’ve seen 6 common financial planning mistakes.
These can cost thousands or even millions of dollars.
In this newsletter, we will explore 6 common financial planning mistakes tech professionals make and some possible ways to avoid them.
TL;DR
Tech companies have lots of benefits, but you want to make sure you make the most of them
Equity comp is complicated, and if you’re not careful, you can get yourself into a lot of trouble
Taxes for tech professionals can be particularly tricky
Mistake 1: Not Taking Advantage Of Your Company Benefits
Some of these are more obvious than others.
But some common company benefits you’ll want to make sure you are taking advantage of:
401k match- “Not taking advantage of an employer match is the equivalent of leaving free money on the table.”
ESPP (particularly with a discount and a lookback) - this is also leaving free money on the table, typically 15% or more.
FSA/HSA - depending on what health plan you have, these accounts can help you save on taxes
Life / Disability Insurance - many companies will offer some amount of life and disability insurance, but it might not be enough
Others: estate planning, fertility support, tuition reimbursement, fitness, and more
Tech companies have some of the best benefits around - make sure you’re making the most of them.
Collectively this could save you thousands of dollars each year.
Mistake 2: Exercising Your Stock Options All At Once
I see this way too often, and sometimes it’s unavoidable (particularly with layoffs)
But exercising your stock options all at once can a) require a lot of cash and b) create a tax bomb.
And if your company is private, you (probably) can’t sell your shares to cover the cost.
Mistake 3: No Strategy For Your Company Stock
About a year ago I met with an employee of a publicly traded tech company.
Over the past few years, the value of their company stock soared, and at the beginning of this year it was worth over $6 million.
But their company stock has been crushed this year and they never sold.
The value of those shares today is less than $1 million.
Earlier this week I was chatting with another advisor on Twitter and he observed that most people’s strategy is “hold/ignore until it becomes a problem.”
This is not a great, long term strategy, and can be downright devastating, especially in years like 2022.
You need to think through how much you want to hold, diversification, and how you want to use your company stock to fund your dreams.
Mistake 4: Lifestyle Creep
A career in tech can lead to a great income, but if you’re not proactive, it’s very easy for your spending to increase just as much.
This is called lifestyle creep.
Or as my dad calls it, “don’t make your best year your base year.”
I’ve seen people double their income but not increase their savings at all.
Spoiler alert - this won’t work long term.
Mistake 5: Getting Surprised By Taxes
Unfortunately, I see this all the time.
And if there’s one thing my clients have in common, it’s that they hate a surprise tax bill.
Stock options - either you trigger AMT when exercising ISOs or your company doesn’t withhold enough when you exercise NQSOs
RSUs - your company doesn’t withhold enough in taxes when your RSUs vest
The dreaded double tax - I just went through this with a client and we caught a $35,000 tax discrepancy
Tax planning is the way
Mistake 6: Only Saving In Your 401k
Don’t get me wrong, 401ks are great, both for the behavioral factors and the tax savings.
But it probably shouldn’t be your only saving & investing.
For most people, there’s a lot of life before retirement:
Trips
Kids education
House
Other investments
It’s why I’m a big fan of brokerage (flexible) accounts.
Putting It All Together
A lot of good personal finance is avoiding big mistakes and instilling good habits.
This is especially true for people in tech with equity comp.
If you can avoid big mistakes, the $100k tax bill, the 50% drop in company stock, etc, you will be that much further along.
We’ve touched on a few of the most common mistakes I’ve seen the past 3 years.
With all the complexities and busy lives, it’s not surprising that tech professionals feel overwhelmed and indecisive.
But being proactive still pays - mistakes have consequences.
It can help to have an informed and objective third party in your corner.
If you need help, I’d love to chat.
WANT TO WORK 1:1 WITH ME?
If you're a tech employee feeling stuck and want to work on:
Building a systematic approach to building wealth
Making the most of your equity compensation (stock options, RSUs, etc)
Maximizing your cashflow
I only take on 1-2 clients each month.