Your Money, Your Plan, Your Future. Fee-only financial planner based in San Diego working locally and virtually across the country helping young families, professional and entrepreneurial women, and military families.
When you have kids, your priorities shift and change. It’s no longer all about you and what you want — you have these little humans who depend on you completely for everything they need.
No pressure, right?
Don’t get me wrong: being a parent is wonderful and the best thing in the entire world. At the same time, there’s no denying raising kids is exhausting and gives you even more reason to need your next vacation.
Which you can have, even when you have young kids and you want to stick to a tighter budget. Here are some of my favorite tips for creating a great trip for your family when you have young kids (and still want to enjoy yourself while traveling).
Beat High Prices and Crowds: Travel on a Budget with Young Kids by Using Shoulder Seasons
Shoulder seasons are the “in-between” times, usually in the spring and fall when they weather is decent but may not be the absolute best the region receives. These seasons are also usually when older kids are in school.
These times can both be cheaper and less stressful to travel within because there are less people trying to get to the same place. Less demand means lower prices for hotels and flights. And less people traveling means fewer crowds to hustle and bustle around with.
Our family is full of huge Disney fans and being located in Southern California means Annual Disneyland Passes are a part of our travel budget. Instead of heading up on the weekends, though, we tend to opt for trips on Tuesdays and Wednesdays when the crowds are lighter and navigating around with a stroller is much easier.
Use Your Credit Card Points and Perks
If you’re a responsible credit card user, take advantage of rewards points that you rack up throughout the year. This will allow you to exchange points for travel, rather than cash.
And depending on what kind of card you have, you might also be able to enjoy other benefits or perks. Some cards get you access to special events or discounted tickets. Others could offer you sales and deals off normal prices — which may equate to a cheap spa day for you.
If you’re really into travel hacking and strategically using credit cards to accumulate lots of points, you might want to reach out to travel and money bloggers who can actually help plan a trip for you.
That credit card will help you get the rewards points you need for the trip — and when you sign up for the card through a blogger, the blogger gets a kickback from the credit card company. If you have any questions about how it works, ask. If the blogger doesn’t disclose how they get paid, look for another resources to help you.
Make Sure Your Kids Will Have Stuff to Do (and Time to Rest)
As long as you keep your kids engaged during the trip, traveling with younger children doesn’t have to be impossible. Think about all the stages of your trip ahead of time and map out solutions to potential problems.
Will your kids have places to get their energy out? Just as importantly, will there be time for them to rest and recharge so they’re not running on empty (and having meltdowns because of it)?
Plan your trip around what you want to do with your family and the realities about what your kids need and can or can’t do, rather than worrying about a specific destination. And then prioritize those experiences over things like shopping or buying stuff while you’re on your trip.
Sometimes, kids can get in free or for reduced rates at attractions, museums, and other locations during your travels (and if you can plan to visit those places, it might help keep your overall travel costs in check).
But other times, kids will cost you more when you travel. You can use various money-saving tips to help offset those added expenses (like using coupons, looking for deals, leveraging credit card points, and so on), or you can simply plan for it and budget appropriately.
The latter is a good option when spending a little more money means a lot more convenience, comfort, and simplicity — all key things you need when traveling with young kids. An example of how you can buy these for yourself might be renting baby and toddler gear rather than bringing your own with you.
We’re fans of renting car seats along with rental cars when we travel now, because honestly – who really wants to lug a carseat on an airplane?
Don’t Skimp on Your Own Research
There are a ton of blogs out there that can help you get started with travel hacking, traveling with kids, saving money, and more — so take advantage of it.
Google, read travel blogs, check out books from the library to figure out where the deals are or what touristy activities aren’t worth the hype or the cost, and so on.
My favorite thing to do these days is add “with a three year old” or “with a baby” after all the destinations we’re considering for a vacation. That lead us to realize (not so surprisingly), that a trip to Hawaii would not be as relaxing as we’d want and all of the activities we would be able to do are the same we have access to in San Diego.
Why torture ourselves with a plane ride with kids for more of the same?
Have a Plan… But Be Willing to Let It Go
Keep in mind that while plans are important, Plan B might be letting go of all your carefully arranged itineraries if stuff goes sideways while you’re on the road.
Being able to adapt and roll with whatever comes your way, rather than clinging to a really specific idea of what you wanted your trip to look like, will help you and your kids have a better time.
If you’re an entrepreneur, it would be completely understandable if you lost track of a thing or two.
You probably have a thousand thoughts running through your mind 24/7. Add in your never-ending to-do list, tasks that need to be outsourced or delegated, and big ideas you want to tackle, and it’s no wonder that some things may slip through the cracks.
Obviously, that’s not something you want to leave on your mental backburner. That’s why I’m giving you a quick reminder on the 5 things you need to make sure are taken care of to avoid putting your financial success and security at risk.
1. Saving for Your Own Retirement
The number-one financial concern you may be neglecting? Retirement savings.
It’s obvious when you stop to think about it, but many small business owners — as many of one-third of entrepreneurs! — don’t save for their own retirement or future financial freedom.
You may have gotten into business for yourself because you wanted the freedom and flexibility entrepreneurship offered over working for someone else. But getting stuck in your own business is just as bad as being trapped in someone else’s.
That’s what’s likely to happen if you fail to save for your own financial future. I get that it’s tough, especially without the benefit of something like an employer match to a retirement plan — but you can keep yourself covered by getting one of these plans made for small business owners.
2. Disability Insurance to Protect Your Earning Ability
But what would happen if you suddenly couldn’t work, run your business, or do anything to earn an income? You’d still have bills and living expenses, but no way to pay for them.
No one wants to think about worst-case scenarios, but the reality is things happen that we don’t foresee, plan for, or want to deal with. Life throws curveballs. We know that happens, even if we don’t know exactly what that curveball will look like.
That’s where the good news is, because it means we can plan for these things. You can protect yourself from a complete worst-case scenario — not having any income coming in — through disability insurance.
If you become injured or ill, disability insurance can kick in and provide you with an income stream so you can continue to support yourself or your family, even if you could no longer work.
3. Life Insurance to Protect Your Family
I know thinking about facing a disability is daunting enough — but we’re going to have to get a little darker, just for a moment. Disability insurance would only cover your income, which is important.
But if you were to face a true worst-case scenario and pass away, your family wouldn’t receive anything from a disability insurance policy. That’s why you need life insurance as well.
The purpose of life insurance is to protect someone who currently depends on your income from financial hardship should that income suddenly disappear through your passing. You need life insurance if you have a spouse (even if that person works) and if you have minor children.
When you consider life insurance, know that most people just need term life. Unless you’re in a very special circumstance, whole life or permanent life insurance doesn’t make financial sense for most business owners and their families.
Critical functions and responsibilities that need to be handled
Roles and individuals who would be responsible for carrying out specific tasks
Areas of the business that depend on each other (and would be impacted by your absence)
Plans for maintaining normal operations even in a crisis situation
You may also want to include notes about what is most likely to be negatively impacted if you were no longer able to perform your duties, and create clear plans around how the business will recover from your loss.
Once you have what feels like an appropriate plan on paper, don’t just trust that it works. Test it and see how well it stands up to the stress it might one day be under. As you find flaws or holes in the plan, address those accordingly.
5. Professional Liability Insurance
There’s one more piece of protection planning you should do for your business (but may be forgetting about). Do you know what would happen if someone sued you or your business tomorrow for something they claim you’re liable for?
Professional liability insurance (which is also known as errors and omissions insurance, or E&O), will cover you where general liability insurance will not. You might not think you need this because you don’t intend to do something bad or harmful to your clients, but mistakes happen.
E&O insurance includes issues over things like inaccurate advice, which can happen even when you have the best of intentions. This policy is just another way to cover your basis and ensure you don’t put everything you’ve worked hard to build at unnecessary risk.
As a busy entrepreneur, these are just some of the things you need to consider and include in your financial plan. But there’s a chance you could forget other important factors that need your attention.
That’s a big problem, because while you may love your business now, you probably don’t want to be stuck in it forever. Eventually, you’ll reach a point where you don’t want to work anymore — or you simply can’t.
Some small business owners plan on having their business continue on without their active, daily involvement and that could provide you with some degree of passive income. But skipping the retirement plan entirely puts you at risk for not having enough to live on in the future.
In all cases, your contributions are tax-deductible as the employer (and you’re considered the “employer” even if it’s just you in your business and you don’t have employees). You may be able to get some tax credits that can help with your costs, too.
Here’s a quick breakdown of each so you can make an informed decision about which might be best for you.
401(k)s for your business can be a great option for you and for your employees. If you don’t have a team, you can look at a solo 401(k) rather than a group plan.
Either way, these retirement plans come with big benefits, like high contribution limits ($18,500 max in 2018) and the ability to make pre- or post-tax Roth contributions. They also offer a ton of flexibility in terms of eligibility for employees, along with more vesting and distribution options.
One more thing to note about these 401(k) plans: they tend to be more costly than some of the other options for small business retirement plans. But this is your best bet if you have employees in your business.
Savings Incentive Match Plan for Employees, or SIMPLE, IRA is a plan that’s available to any small business with 100 or fewer employees. You can also use this plan if you’re a solopreneur and don’t have employees yet. You can contribute up to $12,500 in your SIMPLE in 2018.
If you do have employees and you choose a SIMPLE IRA, you’re required to make a matching contribution of 3% of compensation or a 2% non-elective contribution for each eligible employee, every year.
SIMPLE IRAs are easy to set up and come with low administrative costs, but making early withdrawals can leave you with some steep penalties.
If you take money out within the first 2 years of opening the plan, you’ll face a 25% penalty. For years after the first 2 but before you hit retirement age, the penalty is 10%.
SEP stands for Simplified Employee Pension Plan, and like the SIMPLE IRA, the SEP is easy to set up and inexpensive to manage. The nice thing about SEPs is that you don’t have minimum contributions you must make each year, which gives you more flexibility if your business cash flow varies.
SEP IRAs also come with high contribution limits, so when you do have the cash on hand you can save a good amount of it for your eventual retirement: up to 25% of your net self-employment income, or up to $55,000 — whichever is less.
The fact that you can evaluate whether or not you want to contribute to a SEP each year (and determine how much you want to put in year to year) is a great perk, but if you have employees, note that SEPs can get pricey.
Your plan has to include all eligible employees over the age of 21, who have worked for the employer in 3 of the last 5 years and received at least $550 in compensation throughout the year.
How to Choose and Open Your Retirement Plan as an Entrepreneur
A financial planner can evaluate the options and weigh the pros and cons of each plan against each other, and help determine what makes sense in context of the big financial picture. But to help you get started on choosing the right one for you, consider questions like:
Do you have employees? If not, you may be better off with a SEP or SIMPLE IRA.
Do you want the option to leverage your retirement saving for emergencies (before you reach retirement age)? You’ll likely face fees and penalties if you access any of your money early, but some plans come with heavier penalties than others and plans like the 401(k) offer “hardship” options and loans.
If you have employees, do you and your team need high contribution limits? If so, a 401(k) plan might be best for your business.
Do you need lots of flexibility with the design of your small business retirement plan? Again, a 401(k) might be the best way to go.
Once you decide what plan you want to use, it’s time to get started. You can set up any of these plans at just about any brokerage firm (think institutions like Charles Schwab, Fidelity, TD Ameritrade, or Vanguard).
Each institution will have a slightly different mix of options (and fees), so browse around and compare the options. Or, feel free to use my recommendation: I help my clients open these kinds of accounts at TD Ameritrade right now and have been happy with what TDA offers.
Wondering if you’re doing all you can to leverage the savings and investment tools at your disposal?
If you currently contribute to a traditional IRA, a Roth conversion might be the next step to take to optimize your financial life and further work your wealth.
When you do a Roth conversion, you take money from an existing traditional IRA and convert it into a Roth IRA. While both accounts are individual retirement accounts, they serve two different functions from a tax perspective.
A traditional IRA allows you to make contributions that are tax-deferred, meaning the money you put into the account today isn’t taxed until you withdraw it in the future (when you’re 59 ½ or older).
That gives you a tax break now, which is helpful when you need to grow wealth in your working years. The idea is the more tax breaks you can give yourself in these prime earning years, the more money you have in your pocket to save and invest for the future.
A Roth IRA, on the other hand, doesn’t give you a tax break today — but the money you put into the account grows tax-free and you don’t pay taxes on your withdrawals when you take them in retirement.
And a Roth conversion can help you take advantage of those “wins” on both ends of the spectrum since you contributed (tax-free) to a traditional IRA and you could convert it to a Roth IRA to make your withdrawals tax-free, too.
The Benefits of Converting to a Roth IRA
The point of doing a Roth conversion is to minimize your tax burden so you keep more of your wealth that you worked hard to earn.
That’s the biggest advantage of converting when it makes sense to do so given your current financial situation (which includes things like the tax bracket you’re in and what your overall goals are).
But that’s not the only advantage. Another feature that makes Roth conversions right for many people is that they don’t require RMDs.
RMDs are required minimum distributions, and almost every other tax-advantaged retirement account comes with them. If you have a traditional IRA, you must start withdrawing money out of it each year once you reach 70 and ½ — even if you don’t need the money.
And that can trigger a big tax bill in retirement. Remember, traditional IRAs give you the tax break up front, when you contribute. You’re taxed on what you withdraw.
But if you convert to a Roth, you won’t face RMDs. That means your money can grow, tax free, for as long as you want it to and you won’t be taxed on the money you withdraw in retirement.
Finally, Roth conversions can significantly benefit both you and family or friends you want to leave money to. While heirs that receive your Roth IRA do need to take RMDs on that money, they’re not required to pay federal tax on the withdrawals.
Before You Convert, Know the Potential Pitfalls
While a Roth conversion could be a smart financial move to make, the switch doesn’t come without consequences.
For one, even though many benefits of converting are tax related, you’ll have to pay taxes on the money you roll over from an IRA (or other tax-deferred plan) into a Roth.
This could still work out in your favor in the end, but you need to know this up front so you’re not surprised with an unexpected tax bill in the year you convert — and so that you have a plan for paying those taxes, because just using money in your account might not be a good idea.
Pulling the money out of IRA is a distribution, and that’s a taxable event. In other words, that could just increase your tax bill. And if you’re under 59 and ½, you can add an additional penalty for an early withdrawal on top of that.
How to Decide if a Roth Conversion Makes Sense for You
It’s important to feel confident about your decision to convert your IRA into a Roth because you can’t take it back.
To make sure it’s the right move, you need to think about things like what the money in the account is for and the tax bracket you’re in today versus where you might be in the future.
When you do a Roth conversion, the money in the Roth is subject to a 5-year hold on withdrawals — meaning you can’t take it out of your Roth until after that time period.
For most people, that’s the plan anyway: do the Roth conversion and then leave that money alone until you reach retirement. Again, it’s just something to be aware of before you make the decision.
More importantly are the tax consequences of converting an IRA into a Roth. You need to think about how you’re taxed both in the current year and how you’re likely to be taxed in to the future.
The money you move over will probably count as income you need to report. If you’re currently teetering on the edge of a tax bracket, a conversion could push your income just high enough to land in a place where you’re taxed at a higher rate.
That’s obviously something you want to avoid, which may mean waiting to do a conversion or only converting some of the money in your traditional IRA or tax-deferred retirement plan.
Comparing tax brackets today and years into the future is another factor that will help determine if a Roth conversion is right for you. If you believe you’ll be in a higher tax bracket later, converting now could ease your future tax burden.
But if you expect to be in a lower tax bracket when you want to use the money in your account, a conversion could actually cost you more in taxes.
Of course, no one has a crystal ball and that’s what makes this kind of decision tough to make on your own: you may not feel certain, or 100% confident, that you’re doing the right thing.
This is where a lot of the value of a financial planner exists! You can get a second opinion from an objective, certified expert who works in your best interest. Talk about a confidence booster.
Wondering if you can afford to pay yourself more? Know you need to reduce spending to save more towards your goals, but not entirely sure where you can cut costs?
Or maybe you’re thinking about making a new hire or investing in a business coach. Can you afford to do that — or do you need to increase prices?
The answers to these questions and more lie in your profit and loss statement, or your P&L.
Why Your P&L Matters
I know you didn’t get into business to read and analyze a bunch of financial reports. So why am I telling you that it’s critical to not only know what your P&L is, but that you’ve got to learn to read it too?
Because it can seriously benefit you as an entrepreneur to get familiar with your profit and loss statements. It helps you stay informed and make better business decisions.
You don’t want to pay more in taxes than you have to — but you also don’t want to pay far less and end up facing fines and penalties.
But most importantly, knowing how to read these statements allows you to ensure it’s an accurate report. Again, you need your P&L to be correct because it can impact your tax liability and it will help you answer those pressing questions about where you can spend and where you should invest in your business.
Your profit and loss statement is a document that summarizes your business’ gross revenues, total expenses, and net profit all in one place.
It gives you a big-picture overview that can provide insight into the health of your business, because it shows whether or not you generated a profit (yay!), or if you operated at a loss, meaning you’re spending more than you’re bringing in(yikes).
But if you’re thinking, “hold up. I don’t have a P&L report! I just have an income statement.”
…that’s okay, because we’re talking about the same thing.
Profit and loss statement (or report), P&L, income statement, earnings statement: there are a lot of names this document goes by, but they’re all talking about the same information about your business.
It doesn’t really matter what you call your P&L. It simply matters that you know how to read it and understand what it tells you.
How to Read a Profit and Loss Statement
Here’s the good news: your profit and loss statement is based on a really simple formula:
Sales – Costs = Profits
Let’s break that down together:
Sales means your gross revenue or income. It’s what your business earned before you had to pay for anything (or anyone) to run it.
Costs are your expenses. Expenses includes your direct and operating costs, any interest you paid or depreciation experienced, and taxes.
Profits represent your net income. In other words, it’s what’s left of your gross after all your costs are accounted for.
Pretty simple, right? The formula isn’t complicated. The tricky part of a P&L might come from breaking down these totals into subcategories and organizing them properly.
Knowing what to look for might not be so obvious, either. In general, most businesses look for signs of growth.
Savvy entrepreneurs also dig into the difference between revenues and net income and see how they might be able to make adjustments to their expenses in order to increase that bottom-line number and run a more profitable business.
Keep These Questions in Mind When Reviewing Your Report
As you review your P&L, here are some other questions you might want to think through:
How does revenue this year compare to the same time from last year? If you see a change in gross income, dig in and find out why. If you grew, can you pinpoint what allowed that to happen? If your revenues shrunk, do you know what changed?
How much am I bringing in after expenses? Most business owners like talking about their gross revenue — but that’s not actually what you took home. You need to know what’s left (especially for personal financial planning purposes).
What is my net compared to my gross? Again, it’s not enough to just consider what you grossed. You need to focus on your net and then compare that to your total to understand what your profit margin is. There could be room to grow that margin by reducing expenses.
What am I actually spending versus what I think I’m spending? Just as you need to review your personal budget to stay mindful of your finances, looking at your P&L can ensure you know what actually happens in your business. When it comes to money, business or personal, what we feel like doesn’t reflect what we end up doing.
Finally, consider your P&L report as a whole and ask yourself: is my spending realistic or sustainable if I want to pay myself more or invest in other areas?
A profit and loss statement can give you a lot of insight into the financial health of your business. It can also show you what may need to change if you want to stay on track to meet all your goals — both in your business, and in your personal life.
Have access to an ESPP but have no idea how to work it?
You’re not alone. This is a type of benefit not offered to everyone, so figuring out the best way to leverage it or fit it into your financial plan can be tough.
An employee stock purchase plan, or ESPP, is a benefit offered to some employees as part of a overall compensation package. Essentially, an ESPP allows you to buy your company’s stock at a discount.
That creates a new avenue to explore when it comes to increasing your net worth — but there are some risks involved (as carrying too much of any company’s stock could leave your portfolio without enough diversification).
If you’re not familiar with the ins and outs of your employer’s ESPP plan, let’s take a look at why it could provide you with a lot of value and what you need to consider before taking advantage of yours.
How Does Your ESPP Plan Work (and Why Is It So Valuable)?
Some publicly-traded companies offer employee stock purchase plans as a way to let employees enjoy the success of the company as a whole through discounted shares. That discount usually runs between 5 to 15 percent.
There’s typically an enrollment period, and during this time you can decide how much company stock you want to purchase. Most companies provide a 12-month or an 18-month offering period. That includes a couple of 6-month purchase periods.
When you enroll, your company begins taking contributions from your paycheck until the last day of the current purchase period. At that point, the company uses the funds to buy company stock on your behalf.
In most cases, you can contribute anywhere between 2 percent and 15 percent of your salary, or up to $25,000 per year. Depending on the terms of your plan, there might also be a minimum contribution.
Some companies sweeten the deal of an ESPP plan by doing more than just offering discounted stock. Some plans offer what’s called a lookback provision.
That lets you choose to buy the company’s stock based on its closing price on the first day of the offering period or the last day of each purchase period — whichever is lower.
Say you got a 15 percent discount on company stock through your ESPP plan. At the end of a purchase period, your company’s stock is 5 percent higher than it was at the beginning of the offering period.
If your plan includes a lookback provision, you can choose to purchase the stock at its cheapest price which effectively gives you a 20 percent discount.
Why is this all so (potentially) valuable? Because if you can purchase stock at a steep discount, then you can sell it for more than you purchased, which allows you to earn a profit.
Before you rush to sell your shares, however, there’s still more to understand and consider about your ESPP plan.
Once You Buy In… What Do You Do Next?
If your company offers an ESPP, it may sound like a no-brainer to start buying up as much stock as you can so you can sell it to make money. But while the discount on shares can offer a way to earn some easy gains, you need to be strategic about how you take advantage.
For starters, think about your company stocks in terms of what you can afford. As we mentioned, some ESPPs have a minimum contribution amount.
If meeting that minimum is going to break your budget, it might not be worth putting your short-term financial needs at risk for up to 6 months while you wait for the purchase period to end.
Once you decide to contribute, you need to think through a plan for what you’ll do with the shares you purchase. You have two main options: sell or hold. Either choice comes with advantages and some downsides.
Expect to Pay Taxes If You Leverage Your ESPP Plan
If you sell your shares as you purchase them, make sure to plan for the fact that you have to pay taxes on your gains if you sell your shares immediately. When you sell as soon as you receive your shares, your gain comes from the discount you received on the stock.
In other words, selling immediately means you didn’t earn a gain because the share increased in value, but because you were able to buy it below market value in the first place.
When you sell immediately and receive a gain because you bought at a discount but sold at market value, that gain is considered as part of your compensation and is taxed at your ordinary income tax rate.
But let’s say you decided to hold onto your shares and didn’t sell right away.
If you have any gains beyond the discount — meaning, if your shares increased in value after you bought them — you’d need to hold onto the stock for at least a year after your purchase date and 2 years after the beginning of the offering period to have your earnings taxed as long-term gains.
The advantage of waiting to sell until your earnings qualify as long-term gains is that this will usually reduce the amount of tax you owe on them.
But there’s absolutely no guarantee your company’s stock will increase in value, which means you risk losing money overall.
Choose the Right Strategy to Make the Most of Your ESPP Plan
Regardless of the tax ramifications, an ESPP plan is a valuable asset if you have one — and you need to consider utilizing it.
To maximize your earnings, most employees can follow this strategy:
Sell as soon as you can and set aside a portion of your gains to cover taxes.
Allocate the remaining funds, after you account for what you’ll need to pay for taxes, to your financial goals.
This way, you take on much less risk since you’ll most likely see a gain because you purchased your shares at a discount. If you hold onto them, the share price could go down and you could not only fail to earn anything but you could lose money.
Keep in mind that there are exceptions to this strategy. If you’re confident in your company’s future and expect big returns over the next year or two, it might be wise to hold onto at least a portion of your shares.
But making that call on your own is tough, which is why I can’t emphasize it enough: you need to talk to an objective third-party to make sure you’re taking the actions with your ESPP that best align with your long-term, comprehensive financial plan.
What kind of compensation do you receive from your employer in exchange for doing your job?
You might just say, “my paycheck,” but that’s probably not the only kind of compensation you receive. Your company benefits count, too — and can do a lot to help your personal bottom line.
Your benefits, for example, might include health insurance policies that are far cheaper through your employer than the coverage you could buy on your own. Your benefits might also include other perks, like stipends or reimbursements for certain kinds of spending.
And you might have access to some kind of retirement plan, like a 401(k) or SIMPLE IRA, that comes with a matching contribution to your employer. This is where you can really leverage the perks of your job to grow your wealth.
Another way to do just that? Depending on your job and company, your compensation package might, at some point, include employee stock options, restricted stock units, or some form of incentive plan.
If you have access to these benefits — or your employer just made these available to you — and you’re wondering how to make the most of them, read on.
What Are Employee Stock Options?
When you have employee stock options, it means the company is giving you the right to buy a certain amount of company stock at a set price by a specific expiration date. That price is called the grant, exercise, or strike price.
The date the stock becomes available to you is the issue date, and the grant price is usually the same as the market value of the stock on that issue date (although it can be higher or lower, depending on the company and the specific type of option).
You may not be able to exercise your options on the issue date. There’s another date, called the vesting date, that determines when you can actually buy and sell company stock. In most cases, your options “vest” 3 years after the grant date, and then you have 7 years to exercise before the options’ expiration date.
You’ll also want to know if you have ISOs or NQs. ISOs are incentive stock options and NQs are non-qualified stock options. There are some differences in the limitations on each and how they’re taxed, so be sure to understand which you can access before you exercise any options.
Why Employee Stock Options Offer Opportunities to Grow Wealth
The reason all this is something to get excited about if you have access to stock options? The grant price on your stock options doesn’t change, even if the market value of the stock increases.
That means that during your exercise period, or the amount of time between the issue date and the expiration date of your stock options, you can earn a significant amount of money in addition to your salary because you can access company stock for less than what you can turn around and sell it for.
If you purchase a lot of options and the company’s value falls, you could risk selling your shares for less than you paid.
For this reason, it’s critical that you have a smart strategy when it comes to exercising your options
You should put this plan in place ahead of time, and know whether you’ll buy and hold (and if so, for how long), if you’ll buy and sell (and if so, how much), or use another strategy.
Stock Options Versus RSUs or Incentive Plans
Have restricted stock units (RSUs) or access to an incentive plan instead? You can still leverage these benefits to work your wealth. Here’s what you need to know, and how to leverage them.
Like stock options, RSUs also have vesting periods in which you’ll have to wait to do anything with them. Unlike options, RSUs aren’t a “right” to buy company stock. They’re units that you can exchange for company stock.
RSUs also come with less risk, since they’re units that allow you to receive shares of stock. This means you’re not buying in; you’re just using one of your units to receive one share of stock.
The company’s value can still go down, but that only reduces the size of your benefit. It doesn’t put you in a position of losing money, like a stock option can if you buy for more than you’re later able to sell for.
Incentive plans are pretty much what they sound like: ways for a company to incentivize you to reach higher levels of performance that are in turn profitable for the company. When you reach a certain goal or benchmark, you’re rewarded (and thus incentivized) for your efforts.
Other incentive plans include different types of profit-sharing and bonuses or commissions, but incentives could also include specialized training and education.
The logic behind incentive plans that if you know you hold company stock or could receive a portion of the profits, you’ll be motivated to do your part to increase the company’s value.
If every employee has this mindset, there’s a good chance that the collaborative effort of every worker’s best effort will increase productivity — and profitability.
What to Do with Your Options, RSUs, or Incentives
When I have clients with incentive plans, I tend to suggest take action immediately upon vesting. Then, we earmark a certain amount of the money earned from the sale for short term capital gains tax.
Once taxes are accounted for, we can use the net proceeds towards an important to-do in the client’s financial plan, like paying down debt or saving up for a home payment. These awards are really great to leverage when you’re working towards a specific financial goal.
Here’s an example of what you could do with your own incentive plan:
Let’s say on January 1, 2014, your company issued employee stock options that gave you the right to buy 1,000 shares of the company’s stock at a price of $15.00 a share. You have until January 1, 2024 to make those purchases if you want to.
Now let’s say that on March 1, 2017, your company stock reached $25.00 a share and you decide to exercise your employee stock options.
To recap so far:
Your grant price is $15.00 a share
The current market price is $25.00 a share
Your issue date is 1/1/2014
Your exercise date is 3/1/2017
Your expiration date is 1/1/2024
To exercise your stock options you must buy the shares for $15,000 (1,000 shares x $15.00 a share), but then you could sell them for $25,000 (1,000 shares x $25.00 a share).
You’d have a profit of $10,000, but would need to set aside for short-term capital gains taxes before utilizing the gain towards any goals.
All these benefits can get really complicated, really fast, thanks to the tax ramifications of exercising, selling, or profiting from your company’s stock or incentive plans. You really need to understand the financial consequences of every action you consider taking before you make a final decision.
Stock options, RSUs, and incentive plans provide you with a path to build your wealth outside of your normal compensation from your paycheck — but they also carry the potential to do serious damage to your financial plan if you’re not careful about how you use them.
Whether it’s a new baby, a new job, or a big purchase, a lot of transitions don’t come with guidebooks to tell you what to do… which can be pretty scary on its own. Throw in the fact that this change might stress your finances, too, and you’ve got a recipe for some tough convos ahead.
But again, don’t avoid talking about it. Be open and vulnerable, and express your concerns or fears. It may be difficult, but try to do this calmly and objectively — which means you might need to be proactive and have the conversation before you have a meltdown from trying to bury your emotions.
You may need to explain to your partner your intentions in communicating how you feel, too. Explain that you want to find a way to work through something that’s stressing or scaring you together, and you’d like that support.
Providing that context upfront will help them understand where you’re coming from — and could help avoid them feeling like you’re just unloading on them and your outburst is coming out of nowhere.
What can you do to plan ahead for this change or transition? What can you do now to prevent financial stress in the future?
Write out all the actions you can take immediately — and then divvy up the list between you and your significant other. Commit to handling your action items by a set date, then plan for a second meeting to come back together once you’ve both taken care of your to-dos to check in.
Setting a New Budget
Budget can be a very bad word if you and your partner have different perspectives on your personal finances (and different money habits around spending and saving).
This might be a tough money conversation but it doesn’t have to become an all-out war.
Again, schedule a time to come together and look at things objectively. When you do sit down to look at your accounts, bills, and existing budget or transactions, avoid pointing fingers or laying blame on the other person.
You can’t change anything that happened in the past. The point is to find a way to create a budget that works for you both and move forward toward your financial goals together.
Make sure you understand the basics, like your net income and your fixed expenses (like your rent or mortgage). Understand what you pay on average for other bills that vary from month to month, like groceries. And don’t forget to bring your savings goals to the table.
In fact, you might want to start building your budget around those goals. What do you need to save each month to create the life you want together? Those should be the priority line items in your budget.
Next, create line items for those fixed and flexible expenses. (Your monthly payments to debts and balances count as expenses!) Take a moment to subtract your savings contributions and all your expenses from your net income.
Whatever’s left is what you could use for discretionary spending — or things like entertainment, shopping, and travel. From here, you can identify what you might want to spend on together. But you’ll both likely have things you want to buy that the other person doesn’t care about.
Instead of trying to compromise or convincing the other person to change, you could create a small space in your budget so you each get an “allowance” each month, or what I like to call “freedom money”.
Maybe you can each get $100 of fun money. You can do whatever you’d like with yours, but when it’s gone, it’s gone.
Facing Financial Problems
Of course, maybe you’ve worked through the tough money conversation around budgets… but your partner just won’t stick to it and keeps overspending.
Share how you’re feeling and explain the impact your partner’s actions have on you. For example, you might say, “When you spend on things we don’t need and it adds to our existing credit card debt, it stresses me out because it means we can’t save for our dream to retire early and travel the world.”
Avoid pointing fingers, making assumptions, or telling the other person why they’re doing what they’re doing. Try to ask questions and seek to hear why from them.
From there, you can work together to find the best solution to the problem. That will largely depend on the details of your situation.
For some couples, simply addressing the problem and confronting it might be enough to get your partner to realize their actions have a negative impact on you and your household finances.
Or starting the conversation might help you both realize that there are deeper problems that need the help of an expert to solve. Your significant other could be dealing with their own internal conflicts and overspending is just how their struggles manifest.
Other Steps to Take in Tough Money Conversations
Every relationship is different and each of you will bring some kind of financial baggage to the table. Don’t make each other wrong for that!
We all have our own unique experiences that impact how we think about and use money. Keeping that in mind, along with these other “best practices” for tough money convos, can help make your communication more effective:
Be patient and give each other the benefit of the doubt. You both likely want what is best for each other and your family — you might just have different ideas of how to best accomplish that.
Be honest. Admit mistakes and don’t be afraid to ask for help.
In addition to opening up with your significant other and getting through some tough money conversations together, you need to be able to communicate about finances with two other important people in your life:
Yes, it can be awkward to ask your parents about money — especially about their money. (Can you believe 54 percent of adults would rather talk to their own kids about sex than talk to their aging parents about money?!)
How to Bring Up Money Questions with Your Mom and Dad
This doesn’t mean you need to start offering your unsolicited advice. But you can open up the conversation with a few questions to better understand their situation and what they may need to do to keep their financial ducks in a row.
You can also talk about your own situation or share a story about a friend to get them talking. Be mindful about when you ask questions or bring up these topics, too. Finding a time when they’re not overly emotional or stressed is important.
And if they’re still resistant to talk about it? Remind them that you want to ask the questions and understand the answers now so you can help them avoid financial trouble in the future.
As a last resort, you can help them find an objective third-party. They may not want to burden you with the details of their financial situation, but they may open up to a fee-only financial planner whose job is to provide unbiased financial advice and plans.
These are the biggest questions you should be asking your parents to help them — and you — maintain the financial success your whole family wants.
What’s Your Retirement Plan?
This might be one topic that’s easy to get your parents to talk about if they’re excited about an upcoming retirement. Make sure you understand what they’re planning on for life after their working career — and how they’ll fund their plans.
You can ask questions like:
When do you plan to retire?
Where do you want to live? Will you stay in the same place or do you have plans to move somewhere else?
If they haven’t retired yet, you can help them find ways to plan for healthcare expenses, like opening and funding an HSA while they’re still working if they qualify. You can also help them figure out what kind of government benefits they might be eligible for an how those could help pay for healthcare costs.
You might also want to ask if they’ve considered long-term care insurance — especially if you and your family aren’t in a position to provide for your parents should they reach a point where they need 24/7 care.
If they don’t have these documents, they need to speak with an estate planning attorney (and sooner rather than later). You can acknowledge that it might be difficult or just feel morbid, but remind your parents that they don’t have to go through the process for themselves.
Probate can be a long, complicated, stressful process. And anything that goes through probate becomes public record, too. And because a probate judge makes the decisions, it could open the door for disputes within your family and further legal procedures if any relatives challenge the probate court’s decisions
If they do have an estate plan, make sure you know who the executor is. That person, whether it’s you or someone else, needs to understand where to find their will and who to contact should they need to make decisions around your parents’ estate.
Will You Need My Help?
One of the reasons to ask all these money questions of your parents is to understand whether or not they have the financial means to enjoy the retirement they want. These questions can also help you understand if they have the financial means to enjoy any retirement at all.
It might be hard to imagine, especially if you’re doing your best to work your wealth right now. But the reality is, half of American families have nothing in retirement savings.
According to the Economic Policy Institute, the median savings households where the income earners are between 50 and 55 years old is $8,000. For those between 56 and 61, it’s $17,000.
With numbers like these, it shouldn’t come as a shock if your parents will need a little help. It’s important to ask and get a straight answer here so you can plan ahead.
Do they anticipate needing financial support for living or healthcare expenses? Make sure you understand what their budget is, how much of their expenses they can handle themselves, and what shortfalls they may face.
Once you understand the reality of their financial situation, you can make a plan for next steps. That might be helping your parents come up with a more realistic spending plan, or it could mean paying a financial advisor to help them.
There are a lot of other things you can do to help your parents without hurting your own financial situation, but there’s no way to know the right thing to do until you ask these important money questions and understand what their finances actually look like.
If you’ve got kiddos, you don’t need me to tell you: childcare costs can seriously add up. And quick.
I know you want the best for your children, and that can make it even harder to manage the expenses associated with raising kids. Sometimes the best is awfully expensive.
That’s especially true when it comes to the biggest childcare costs, like daycare. Depending on where you live and what your options are, sometimes it’s even cheaper to become a stay-at-home parent than to continue working to pay for childcare.
But many parents want to continue working — and that’s absolutely fine if you fall into this camp. You just need to figure out how to manage the cost of childcare so you can achieve the balance you want in your life.
If you know your family will need some form of childcare in the next year or two, the time to start planning for it is now.
Here are five ways to get out in front of that need — and even save money while you’re at it.
1. Take Advantage of Company and State Benefits When You Can
All states require employers to provide 12 weeks of unpaid parental leave when your child is born. Only California, New Jersey, Rhode Island, and New York currently offer paid family leave.
Connecticut, D.C., Hawaii, Maine, Minnesota, Oregon, Vermont, Washington and Wisconsin all offer expanded versions of the required 12 weeks unpaid leave, too. Be sure to check up on the specific benefits offered by your state to see what you’ll be able to use.
Of course, the price isn’t everything when it comes to a caretaker. Look for discounts where you can — but understand that the best option for your family might not be the absolute cheapest.
This is where planning ahead can come in handy. Once you understand the monthly cost of childcare, create a budget that makes room for that expense now — and start using that budget today.
Because the expense for childcare will be in this budget but you’re not paying it quite yet, that creates a savings opportunity for you. Put that money into a cash savings account that you can use for additional childcare expenses down the road.
3. Look into Options Beyond Full-Time Childcare
Enrolling in daycare full-time isn’t the only choice you have. If you find it’s prohibitively expensive, consider the alternatives.
You might want to work — but could you cut back on hours or take a different position that allows for flexible work time?
You also don’t need to hire an entire daycare center to care for your children. Consider hiring a nanny or au-pair. Depending on where you live, this could be a better value for you and your family than sending your kids to a childcare center.
Grandparents are also the standard go-tos for babysitting and childcare help, so I’m sure you’ve considered that option. But have you considered aunts, uncles, adult cousins and siblings?
And what about other parents who may stay at home and could provide care to your kiddo for a smaller fee than what a professional nanny would charge? You may also be able to join a parenting group that shares in childcare responsibilities.
Take this as an example: A neighborhood mom may watch your kids during the week while you’re at work. You could watch her youngest on some weeknights in exchange when she needs to runs her oldest to extracurriculars after school.
It takes a village to raise a child, right? Don’t hesitate to call on your community to come up with creative options for childcare that could end up costing everyone less.
Ultimately, there’s no one right answer. Just focus on what works best for your family.
4. Take Advantage of Tax Breaks
If your employer offers a dependent care flexible spending account (FSA), don’t think twice about using it. This account allows you to use pre-tax dollars from your paycheck to pay for certain childcare-related costs.
Your employer determines how much you can contribute, but the IRS allows up to $2,500 per year if you’re married but file your tax returns separately. You can contribute up to $5,000 if you’re single or married filing jointly.
Another option is the Child and Dependent Care Credit. If you paid for childcare expenses for a qualifying child to enable you to work or actively look for work, you can get this credit when you file your tax return.
The credit is calculated based on a percentage of your costs, and the total expenses you use to calculate the credit can’t exceed $3,000 for one child or $6,000 for two or more children. (You can’t get this credit if you’re married but file your taxes separately.)
Be careful how many tax advantages you try to take, though. In this case, you can’t use both these benefits for the same childcare expenses. It might help to consult a tax professional to determine the best tax saving strategies for your family.
5. Save in Advance
One of the savings hacks for childcare costs we used in our own family was to start funding daycare as soon as we found out we were pregnant with our second child.
We opened a savings account earmarked for daycare costs and starting contributing immediately. We were able to save up almost a year’s worth of daycare costs before we ever needed to use those funds, which was a huge help.
If you feel like you don’t have enough cash now to set aside for later, it might just take a little shifting of priorities. Take a look at your monthly expenses and find areas where you can cut back a little to focus on this important savings goal.
It might not be easy. But I bet together, we can make it possible.
As a parent, I get how important it is to you to put your child’s well-being ahead of everything else. I don’t think the answer is just to find a cheap daycare and choose a childcare provider based off price alone.
That being said, you need to balance that with your own financial reality. Choosing the most expensive, exclusive childcare option is just as unrealistic.
If you take the time to research and plan well in advance, it’ll become easier to choose the right option for you — and financially prepare to handle the added expense.