Financial Goals: Using Employee Stock

Morgan Stanley at Work 07/26/22
rethinking 10b51 plans image

Morgan Stanley at Work walks through four steps to using your equity compensation to help you achieve your financial goals and create a personalized financial roadmap.

If you receive any form of equity compensation from your company, your holdings can play an important role as you build your personalized financial roadmap and work toward your objectives.

Strategically using your company stock may make it possible for you to meet certain milestones sooner, or provide more flexibility for your long-term financial 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 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. Once you’ve worked through the details, you may decide that certain moves make sense for your situation, such as purchasing additional stock through your company’s ESPP, or exercising your vesting stock options across various price points in the year ahead if you may benefit from rising prices while also protecting against 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 saving, investing, 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. 

Financial Goals

1-3 years
4-10 years
10+ years
Build an emergency fund
Take a vacation
Buy a new car
Buy a new home
Pay for a child's wedding
Keep this money liquid in high-yield savings accounts, CDs Look into specialized accounts and investment vehicles such as 529 plans, mutual funds, or ETFs Consider IRAs, 401(k)s, mutual funds, ETFs, structured products

For illustrative purposes only.

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 consider how your equity proceeds can support your aspirations. If you do decide to leverage or sell some of your equity compensation, also be sure to consult with your tax advisor so you can properly plan for any potential tax impact.

The source of this Morgan Stanley article, Let Your Equity Compensation Help You Reach Financial Goals, was originally published in March 2022.

What to read next...

Looking to expand your financial knowledge?