When you first start working, it can be confusing to know what to do with your money. Should you invest it? Save it in your bank account? Spend it? If you’re like most people, you probably have a mix of all three. You may also be asking “What are Incentive Stock Options?“
What makes it even more complicated is, what if you’re offered stock options or equity from your employer as part of your salary? How does that impact your plans?
In this blog post, we’ll explore what happens to those stock options when you first start working, what you should do with them, and how they should impact your plans.
What are Incentive Stock Options (ISOs)?
If you’re like many new employees in high-value positions, you may be wondering what to do with the incentive stock options (ISOs) that are offered by your company if you’re offered them. ISOs are a type of employee stock option that allows you to purchase company stock at a discounted price.
There are a few things to keep in mind with ISOs:
1. The discount is typically between 10-20%.
2. You may be subject to taxes on the difference between the strike price (potentially discounted purchase price) and the fair market value (whatever it’s selling for) of the stock at the time you exercise the option.
3. There is usually a vesting period, which means you have to stay with the company for a certain amount of time before you can exercise your options.
4. You may also be subject to capital gains taxes when you sell the stock.
So, what should you do with your ISOs?
Well, that depends on your individual circumstances and financial goals. If you’re thinking about exercising your options and holding onto the stock for long-term growth potential, then it’s important to consider factors like your personal tax situation and the company’s financial health. On the other hand, if you need cash now and don’t want to wait for a potential sale down the road, then selling your options might make more sense.
Whatever you decide to do, it’s important to talk to a financial advisor or tax professional to get expert advice before making any decisions about your ISOs.
How do stock options work?
Stock options are a type of compensation that allows employees to purchase company stock at a set price, usually at a discount. The options can be exercised at any time, but most employees wait until they vest, or become fully owned by the employee. The length of time until an Incentive Stock Option vests is typically four-five years.
There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NQSOs). ISOs are only available to employees, while NQSOs can be granted to anyone. Both types have different tax implications.
ISOs are taxed differently than NQSOs. When you exercise an ISO, you don’t owe any taxes on the difference between the strike price and the fair market value of the shares (known as the spread). However, you will owe capital gains taxes when you sell the shares.
NQSOs are taxed when you exercise them. You’ll owe ordinary income taxes on the difference between the strike price and the fair market value of the shares (the spread). You’ll also owe capital gains taxes when you sell the shares.
The decision of whether to invest or save your money depends on your personal circumstances and goals. If you’re trying to save for a down payment on a house, for example, you may want to invest in a longer-term savings vehicle like a non-retirement account if you have a longer time frame until purchase and invest the money or a bank account if you have a shorter one and keep it uninvested.
Should You Invest or Save Your Money?
When Should You Invest Your Savings
There are a lot of things to consider when you get your first salary, and one of the biggest decisions is whether to invest or save your money. There are pros and cons to both options, so it’s important to weigh your options and make the decision that’s right for you.
If you’re thinking about investing your money, there are a few things you should keep in mind.
1. Investments can be risky, so you could lose some or all of your investment depending on the risk you’re taking with your investment. Make sure you can afford and understand your worst-case scenario of whatever strategy you choose.
2. Investments typically take longer to mature than savings, so you’ll need to be patient if you want to see a return on your investment. Even high-quality investment strategies go down from time to time so if you’re looking for a guarantee, you won’t find one outside of a bank account, CDs or government bonds.
3. It’s important to do your research before investing so that you understand what you’re investing in and how it works. It takes time, effort, analysis, and thought to create a strategy that makes sense for your goals. 100% stocks or 100% bank account rarely make sense for anyone.
The benefit of investing your savings is that, if you have a strong investment strategy, you’re likely to outpace inflation and any bank account in the long run. Short term, you may lose money but don’t get discouraged unless you have no idea what you’re doing. If you don’t know what you’re doing, get a financial advisor. The fee is worth it for people who can’t figure out their finances perfectly. If you’d rather try to DIY it, read our how-to, here.
When to save in a bank account
If saving in a bank account is more appealing to you, there are a few things to keep in mind as well.
- Savings accounts typically have lower interest rates than investments, so your money will grow more slowly in a savings account. This means you’ll have to save more in order to reach your goals (potentially a LOT more).
- Savings are more liquid than investments, which means you can access your money more easily if you need it.
- Finally, savings are generally considered to be less risky than investments, so if safety is your main concern, saving may be the better option for you.
- Ultimately, the decision of whether to invest or save is up to you and should be based on your goals, risk tolerance, and timeframe.
When it comes to bank accounts, we’re a fan of bank accounts at:
- SOFI – High Yield Checking – 2.55% APY
- Wealthfront – High Yield Checking – 2.55% APY
- UFB Direct – High Yield Savings Account – 3.01% APY
*APYs are accurate as of 10/12/2022.
How much can ISOs be worth?
ISOs can be worth a lot or a little, depending on how well the company does and how long you stay with the company. If the company does well and you stay with the company for a long time, your ISOs could be worth a lot of money. If the company does not do well or you do not stay with the company for very long, your ISOs could be worth very little.
What are the risks of investing in stock options?
When you invest in stock options, you are essentially betting that the price of the underlying stock will go up. If it does not, you will lose money. Additionally, there is a time limit on how long you can hold onto your stock options before they expire. This means that if the price of the underlying stock does not rise within that time frame, you will again lose money.
Should you still save for retirement even though you have potentially really valuable ISOs?
There are a lot of factors to consider when trying to decide whether to invest or save your money. One important factor is whether you have any potentially valuable ISOs (Incentives Stock Options) that could be worth a lot of money in the future. If you do have ISOs, you may want to consider saving for retirement even though you have these potentially valuable assets.
The reason why you might want to still save for retirement even if you have ISOs is that there is no guarantee that your ISOs will be worth anything in the future. They could end up being worth nothing or they could be worth a lot of money. If you have other savings and investments, you will be in a better position financially if your ISOs don’t end up being worth anything.
Another reason why you might want to still save for retirement even if you have ISOs is that it can take a long time for ISOs to vest. This means that even if your ISOs are worth something in the future, you may not be able to access that money for many years. This can make it difficult to plan for retirement.
The bottom line is that there are a lot of factors to consider when trying to decide whether to invest or save your money. If you have potentially valuable ISOs, it may be a good idea to still save for retirement even though you have these assets.
There’s no easy answer when it comes to deciding whether to invest or save, but here are a few things to keep in mind. If you’re still in school, then saving is probably the better option since you’ll likely have other expenses (like tuition) that need to be covered. If you’re well into your career, you should probably consider your financial goals sequentially and prioritize short-term over long-term goals, however, if you’re employed and don’t have any major financial obligations, then investing might be a good choice for you.
At the end of the day, it’s up to you to decide what to do with your money. Just remember to think carefully about your decision and always consult with a financial advisor if you’re unsure about anything.