4. Plan How You Will Use the Profits from Exercising Your Options
Anytime you’re expecting an influx of cash, you should have a plan for what you’ll do with it. Of course, you’ll need to set aside enough funds to cover your tax liability, but how you use the remaining money is up to you. It’s wise to have a specific goal in mind, and one that is congruent with the short-term and long-term financial goals you’ve already established. Consider things like paying down debt, supplementing your emergency fund, or saving toward a financial goal like buying a home.
An Example Scenario
Sometimes, talking about stock options in terms of a specific example can help with a more complete understanding of how to best use this benefit from your employer.
Let’s say you have been given the right to purchase 1,000 stock options at the grant price of $20.00 per share. You have until January 1, 2022, to exercise your option to purchase. You decide to wait a bit, and then you choose to exercise your options on July 1, 2021, by which point your company’s stock has reached a value of $35.00 per share.
So, you’ll buy 1,000 shares for a total of $20,000 according to your grant price, but you can sell those same shares for their current value of $35.00 per share – a total of $35,000. This means a profit of $15,000, from which you’ll need to set aside the funds you’ll need for taxes. Then, the rest is yours to do with as you please.
Avoiding Stock Option Anxiety
Navigating stock options isn’t easy, and it causes many employees unnecessary anxiety and overwhelms. The best thing you can do for yourself is to learn as much as you can early on, rather than waiting until the last minute to figure everything out. Planning your strategy early gives you the best chance of maximizing the options available to you.
Stock options are a fantastic employment benefit, but they can be complicated to utilize properly. To ensure you’re maximizing your options, schedule a conversation with us today. We’ll match our professional guidance to your personal goals, and help you leverage your stock options for maximum financial success.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.