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Turning Tight Finances Around: How Long-Term Investments Can Generate Cash

04.11.2023 by admin // Leave a Comment

In today’s uncertain economic climate, many individuals and families struggle with tight finances, finding it difficult to make ends meet and save for the future. And, in the short term, you can bootstrap your budget and reduce your spending as well as raise fast cash. However, to truly turn tight finances around a long-term approach is necessary. It includes investing in yourself and using your time to generate cash either through your career, side-hustles or passive investing. And, in parallel, it’s important to commit to a disciplined investment strategy and taking advantage of compound interest. By pursuing both of these, individuals can create a sustainable source of income that can help them achieve their financial goals. In this article, we will explore a few long-term approaches to generating more cash in the future and turning tight finances around.

Don’t Pay Off Your Low Interest Debt Early

It’s always tempting to pay off debt like your mortgage and car loans off early. But, if you got a mortgage or car loan in the last 5-10 years chances are you locked in a low rate. With high yield saving accounts rising above 4% and Treasury bills rising above 5% you may already be able to generate cash by putting extra money in safe investments than putting extra money towards paying down low interest debt early. Even though it may feel better to reduce your debt, do the math and see if it’s better to pay off your debt on time or pay it off early. Given the current economic uncertainty, it’s always better to have a little extra cash in your emergency fund just in case.

Keep Your Existing Job

One of the biggest investments you can make is investing in yourself, and investing in how you spend your time. We moved from the “Great Resignation” to what feels like the “Great Layoff” in a matter of months. You don’t want to be the person that’s the most expensive but delivering the least! That combination usually is high risk for a layoff with the layoffs start. At minimum, make sure you’re performing in the top 50% to reduce your risk of getting laid off.

Increase Compensation At Your Job

You can find a job externally and get that pay raise but be extremely aware of how your skill set matches that pay because you do not want to be the one let go. Another approach is to strategically network, work hard and get a promotion in your current company. Though it is harder to get promoted in the current environment, opportunities do still exist. You’ll want to be positioned well when those doors open so make sure your boss, bosses boss, mentors and sponsors know your career goals. If you do end up getting laid off take these steps to stay financially stable and get a new job quickly.

Corporate Recognition Programs

Does your company have any recognition programs where you can get cash or points to buy something for a good job? Go above and beyond on a current project to get rewarded. Don’t forget, part of increasing your odds of being recognized is to be good at giving recognition to your coworkers when they do a good job too.

Take Advantage of Corporate Benefits

Go to your company’s internal website and really learn about all of your corporate benefits. You could be paying for wellness services and items and turns out your company reimburses part of that. Same with cell phone plans, subscriptions, vacations and more. To really make an impact, focus on areas you’re already spending money so that it results in a savings.

How does your compensation compare to the market?

Check Blind, and Glassdoor for roles that are similar to yours at other companies. Colorado also recently passed an Equal Pay for Equal Work law. You can find jobs posted in Colorado similar to yours to see the salary range. Note you may need to factor in a cost of living adjustment. If you are being paid less than you’re worth, use this as a negotiating tactic.

Look for Promotion Opportunities

Do you know what it takes to get to the next level? Ask your manager what gaps you need to work on to secure that promotion. Ensure that both your manager and their manager know your career goals. Create a targeted plan to look for that next step. If it’s unlikely a promotion opportunity will open up in your current org, know what orgs will likely have roles open that meet your skill set. Then, start networking with those managers and teams.

Buy Treasury Bills

A Treasury bill is a short-term debt obligation issued by the U.S. government. They have different maturity time frames including 3 month, 6 months, 9 months, a year and longer fixed timeframes. T-bills are sold at a discount to their face value. This means you will pay less than face value. Then, you’ll receive the interest + initial principle (face value) when the T-bill is redeemed at maturity. Recently, the yields got as high as 5% in early March, but have cooled off to 4%+ more recently. You can buy Treasury bills at Charles Schwab, other brokerages or Treasury Direct.

Buy Certificates of Deposits

A certificate of deposit (CD) is a type of financial instrument issued by banks and credit unions that allows customers to invest money for a fixed period of time at a fixed interest rate. Recently, CDs have been offering higher interest rates than high yield savings accounts and Treasury bills. A trade-off is customers agree to keep their money in the CD for that specified term. Terms can range from a month to a few years. CDs can be bought through banks and brokered CDs can also be bought through brokerages.

Put Your Cash In a Money Market Fund or High Yield Savings Account

While you’re planning how to best make more money in the long term, put your cash in a money market fund or a high yield savings account. A money market fund is a type of mutual fund that invests in short-term, low-risk securities. Examples of these securities include commercial paper, Treasury bills, and certificates of deposit. These funds aim to provide a higher rate of return than traditional savings accounts or checking accounts while maintaining a relatively low level of risk. Money market funds can be purchased at brokerages like Charles Schwab, Vanguard and Fidelity.

A high yield savings account is a type of savings account that offers a higher interest rate than traditional savings accounts. These accounts are typically offered by online banks and financial institutions. The best yield high yield savings accounts have been offering changes frequently. It’s good to check once a month to see if you’re still getting the best rate.

Series iBonds

The interest rate for Series iBonds are not as high as early last year. So, Series iBonds are a good investment to have on watch although they may not be the best investment now given the current interest rates offered by Treasury bills and CDs. Until April 2023 the interest rate offered is 6.89%. You’ll earn that interest rate for the first 6 months and then will follow whatever interest rate is the set rate.

The Series iBonds are a longer term way to earn extra cash because you must hold for at least a year. After a year passes, you only lose 3 months of interest as penalty up until you’ve held for 5 years. There are some tax benefits too – you never have to pay state income tax on the interest gains! You can only buy up to $10,000 / year per person.

Due to the limitations, the Series iBonds don’t make sense for everyone but are potentially good to consider if you have a large purchase you will make in the next year or two.

Play the Long Game With Investing

Research and Form Thesis with Your Stock Investments

Have your investments been on auto pilot the last few years? Or, have you been picking the “hot” stock of the week or busy “buying the dip”? Learn how to navigate volatility and update your investing strategy accordingly. Learn about what you’re investing in, and technicals. A good place to start is learning about the 4 stages all stocks eventually go through and the stages where you make the most money. Generally, long term investing outperforms short term investing; however, it depends on market conditions and when a person buy / sold. Keep in mind that not all companies perform well over time. Don’t just buy the dip, because it could keep dipping. Do your research, form your thesis and then be patient. When your thesis breaks, sell the stock. Alternatively, put it on auto pilot with index funds and dollar cost average.

Buy Alternative Investments

While most investing discussed is around the stock market and real estate, don’t forget that physical items can be investments too. One study that looked at retired Lego sets found that on average they returned 11% a year. Business Insider found that Rolexes out performed houses, gold and the Dow Jones over the last decade. While previous performance may not be representative of future performance, it’s good to consider alternative investments as part of your investment portfolio.

How do you plan to make more money in 2023?

Evaluating Equity Comp: Are Stock Options or RSUs Better?

03.14.2023 by admin // Leave a Comment

Considering a career change or have multiple offers in hand? How do you compare equity compensation? Equity compensation can be a catalyst to growing your net worth. Putting a true dollar value on equity compensation is tough when you’re looking at a private company. When the company is publicly traded though, you can look at the latest stock price and know how much the equity grant is currently worth. However, it’s tough to know how much the equity comp will be worth when it vests. When evaluating different equity compensation at publicly traded companies, which is better stock options or RSUs? In this blog post, we’ll explore the pros and cons of stock options and RSUs to help you determine which is the best choice for you.

What are Stock Options?

Stock options are the right to buy a specific number of shares of company stock at a pre-set price following a vesting period. If your pre-set price is $10 and the stock is currently at $50 you pay $10/ share. This is known as the exercise or strike price. When you hit the first vesting period you can exercise your stock options. After you hit that vesting period, you have the right to purchase company stock at that predetermined price whenever you want. It can be that same day, it can be 2 years later – the choice is yours.

To motivate employees to work hard and drive the stock price up a company might grant a large number of options that are significantly below the current market price. Combined with your flexibility to sell any time after they vest, you may have the ability to purchase shares significantly below the current market value. Conversely, if the stock price does not go up significantly, you may not be able to benefit from the equity compensation at up. The stock price could even decline to the point where your equity compensation ends up worthless.

What are Restricted Stock Options (RSUs)?

Restricted Stock Units, or RSUs, are a form of compensation offered by employers to employees. They are company shares that are restricted, meaning that you can’t sell them right away. Instead, you will be given shares that vest over time. When you accept RSUs, they will come with a vesting schedule. Often, you’ll see vesting schedules that span 3 or 4 years. This schedule will show how many shares will vest on which dates. Typically, there will be one day per year and each of those days will be a year apart. On that date you are given those shares at the price of the stock that day. They have no tangible value until the vesting date. If you leave the company before the vesting date that means you walk away from this future compensation.

How Are Stock Options and RSUs Different?

Stock Options and RSUs Redemption

Stock options and RSUs can both have similar vesting schedules. The vesting schedule will depend on what the company offers. Usually, equity compensation is a way to encourage employees to stay at the company. As a result, you’ll often see vesting schedules that span a few years. You may get 1/3 of the equity grant at the end of year 1, 1/3 at the end of year 2 and the last 1/3 at the end of year 3. If you leave the company before your RSUs or stock options vest, you will forfeit the unvested shares.

While they both have vesting schedules, what happens upon vesting is different. When your options vest, nothing happens unless you decide to exercise your option to buy. If you exercise your option to buy, you can initiate an exercise-and-hold transaction (cash for stock), initiate an exercise-and-sell-to-cover transaction or initiate an exercise-and-sell transaction (cashless) depending on your personal situation and goals.

When your RSUs vest, you now have shares of the company you can sell at any time. You are given the shares, and taxed through your paycheck if you sell to cover or have to pay taxes on this additional income at tax time.

Stock Options and RSUs Selling Times

While they both have vesting schedules, stock options and RSUs differ in flexibility to sell. When stock options vest, nothing happens until you decide to exercise your options. You can decide to sell your options that day, or years later. However, your vested options are still tied to your employment with the company. If you decide to leave the company you will likely need to exercise your vested options within 90 days.

With RSUs, when they vest, you have shares of the company you can sell at any time. If you sell within a year it will be taxed as short term gains/ losses. If you sell after a year, the RSUs will be taxed as long term gains / losses.

How Stock Options and RSUs are Taxed Differently

Both stock options and RSUs will not be taxed when you first receive them. But, they will be taxed upon vesting. And, how they are taxed upon vesting is different.

How Stock Options Are Taxed

With stock options, how you are taxed depends on what type of stock options you have. There are two main types of employee stock options – non-qualified stock options (NSOs) and incentive stock options (ISOs). If you have NSOs, you are taxed as ordinary income when you initially exercise the stock for the difference between the current stock price and the price you bought it at. With ISOs, you get taxed when you sell the shares. If you sell the shares after holding less than a year you’ll be subject to short term gains taxes and if you sell the shares after holding longer than a year you’ll be subject to long term capital gains taxes.

How RSUs are Taxed

RSUs are given to you at $0 and they converted to the value of the company stock when they vest. When RSUs vest, that is a taxable event whether you choose to sell that day or not. Therefore, you will be taxed on the full amount at the total fair market value of your stock grant on the vesting date. When you sell your RSUs your taxes will be calculated based on the strike price. The strike price is the price of the shares when they become vested. If the shares were originally $100/ share when you got your RSU grant, but the shares are worth $50/share the day they vest you will be taxed on the $50/share price. Upon vesting, this is when you get to decide if you want to keep the shares or sell them. Whether you decide to keep or sell the shares, it’s recommended to sell enough to cover the ordinary income tax for the shares.

Are RSUs Better than Stock Options?

Ultimately, whether RSUs or stock options are best depend on your personal goals and how much you think the package you were offered will be ultimately worth.

How to Open a Custodial Account at Charles Schwab

03.07.2023 by admin // Leave a Comment

Custodial accounts are a powerful financial tool for parents who want to help their children get started on the path to financial success. It enables parents, or other adults, to open up an account on behalf of a child and start investing on behalf of a child at an early age. There are many benefits to opening a custodial account for a child, including financial education opportunities and tax benefits. But, how do you actually open up a custodial account for a child? In this blog post, we’ll review how to open up a custodial account for a child at Charles Schwab.

What is a Custodial Account?

A custodial account is a financial account that is managed by an adult on behalf of a minor, typically a child under the age of 18 or 21 (depending on the state). The adult who manages the account is known as the custodian, and they have the legal authority to manage the funds and investments in the account until the minor reaches the age of majority. Once the minor reaches the age of majority, the funds in the custodial account are legally theirs to control and use as they see fit.

Custodial accounts can be opened at banks, brokerage firms, or other financial institutions, and can hold a variety of assets such as cash, stocks, bonds, and mutual funds. The custodian is responsible for making investment decisions on behalf the minor.

How to Open a Custodial Account at Charles Schwab

To open a custodial account at Charles Schwab, you can follow these steps:

Visit the Charles Schwab website and click on the “Open an Account” button.
Select “Brokerage Account” as the account type, then scroll down to “Additional Accounts” at the very bottom of the page
Under the Educational and Custodial box, select “Custodial Account”
This next screen tells you it will take about 10 minutes and you’ll need: U.S. permanent resident address for yourself and the minor, a Social Security Number or Tax Identification Number for yourself and the minor, Employer’s name and mailing address (if applicable) for yourself and the minor.
Fill in your personal information – if you have an account most of your information will already be pre-populated.
Verify your mailing address.
Provide your employment and financials. This will also be pre-populated if you already have an account with Charles Schwab.
Answer the standard financial questions such as do you own 10% or more of a public company.
Provide the minor’s information including name, date of birth and social security number.
Provide the minor’s legal address and phone number – you can click the checkbox up at the top to use the same address and phone number as yours.
Provide the minor’s employment status and financial net worth. There is an option to say “not employed” and you can also can put $0 salary and $0 net worth.
A screen asking about the state and the age of termination will pop up. Based on the state, the age of termination options will change. For example, some states are age 18, some are age 21, some offer both options and some states offer other ages. You are able to select the age here, and it will tell you what year that is.
A screen asks about additional details for the minor, the standard financial questions like if they own 10% of a company.
Select what the source of funds will be for this account and the primary purpose of this account.
Select if you want checks, options trading and if you want to go paperless.
Consent to the terms and conditions and hit submit.
The application for a custodial account has now been submitted and you wait for approval or get started on funding the account.

Keep in mind that specific requirements and procedures may vary depending on the state you reside in and the type of custodial account you want to open.

How Do You Transfer Ownership Of A Custodial Account To The Child?

When the child reaches the age of majority, the custodial account will need to be transferred to the child. The account can be transferred into their name only with custodian consent. To do this transfer, contact Charles Schwab, or the brokerage holding the account.

Have you opened a custodial account for your child? What was your experience like?