Most of us like to think that we make financial decisions based on purely rational terms, that money is just an economic asset. But if we’re being honest, neither of these deep-seated assumptions are true. Our real relationship with money is often emotional, impulsive, and less than logical.
In my time as a wealth manager, I’ve seen money make people’s dreams come true. I’ve also seen lives and families collapse because of it. In both cases, people have made big, important financial decisions based on what they were feeling in the moment. I’m not immune to this myself. None of us are. Anyone who thinks emotions don’t factor into their finances likely hasn’t looked at the evidence — but it’s there, in the ways we spend, save, invest, donate, and think about our economic well-being.
In my experience, this is particularly true for employees who are deciding whether to exercise their company stock options. This source of income has the potential to be incredibly valuable, but it can also conjure complicated emotions. You might think, for instance, that selling your vested stock shows a lack of confidence in your organization or team. You’re spending most of your day at work, putting your blood, sweat, and tears into it. It’s easy to link your financial investment to your professional investment.
Although these anxieties are perfectly normal, they are also likely to cloud your judgment and lead to missed opportunities. To make decisions that are best for your financial future, you need to learn to separate your money from your emotions.
Put yourself before your company.
To start, I recommend thinking of stock options like other forms of compensation. They’re accessible funds that you can put toward any purpose: paying debt, buying a home, building education savings, traveling, funding retirement, or even stabilizing your current financial situation. If you exercise your options at the right time, you could make valuable contributions to all of the above.
The sooner you realize that cashing in your stock is not equivalent to betraying your company, the sooner you can start making smart decisions about your money. You have every right to manage your financial life independent of your career.
Make rules — and don’t break them.
To keep the emotions of an immediate crisis — such as a declining stock market — from affecting your finances in the long term, come up with a system where you can approach decisions about when to sell company stock objectively.
For instance, every investor knows to buy low and sell high. Yet when the market shows a weakness, many people panic and start selling, only to watch their lost stocks reach new highs months later. Removing emotion from the equation can prevent these kinds of impulsive decisions and produce measurable gains in the process. In fact, one study found that investors saw 23% higher returns over 10 years when they used behavior-modified investing to minimize emotional decision-making.
One way to do this is by putting parameters in place, like choosing a specific price to exercise and/or sell your stock options. If the stock hits that price, you execute — no matter how you’re feeling that particular day.
Another strategy is setting up specific target allocations and rebalancing when necessary. For example, let’s say you’re aiming to keep 5% of your overall assets invested in your company stock, 65% in the general stock market, and 30% in bonds. If your company stock does really well and accounts for 8% of your overall allocation, you should exercise/sell enough stock to get you back to your 5% target. Similarly, if the overall stock market does well and your stocks account for 70% of your overall allocation, you should sell enough to get you back to your 65% allocation.
These kinds of hard and fast rules will help you make rational decisions rather than emotional ones.
Think about yourself and your loved ones.
Too many people focus only on maximizing their stock compensation. Do the opposite: Use your time and attention to determine the right goals for you, your partner, or other loved ones in your life. That’s what really matters. Once you have that figured out, use your wealth (both cash and stock options) to fund those goals.
Before selling, pause and ask yourself: Will exercising your options to fund [purpose] help you and your loved ones reach your long-term goals? Weigh the risks and expected returns before making a decision.
That said, if your financial present fills you with stress, you may need to address it before investing in your future. For people who are struggling to manage their money or who are in danger of receding into serious debt, selling your stock to fund your short-term needs could be a good option. Keep the following in mind (arranged in order of importance):
- Work toward building your emergency fund, which should consist of a minimum of three to six months of nondiscretionary expenses. An online money market account is often the best place to put your emergency fund because it pays slightly higher interest than brick-and-mortar banks.
- Make contributions to employer-sponsored retirement plans (up to the level of your company’s match).
- Pay down debt with a high interest rate (at least 7% to 8%) that is not tax-deductible (i.e., credit card debt).
- Make maximum contributions to tax-advantaged investment accounts (e.g., 401(k), IRA, and Roth IRA accounts).
- Pay down debt with high interest (7% to 8% or more) that is tax-deductible (e.g., student loan debt).
- Contribute to investment accounts with no tax benefits where you expect to earn returns greater than the interest rate on any remaining debt.
- Pay down debt with interest rates that are less than 7%.
Prioritizing these short-term needs with the money from your stock options will allow you to more easily fund long-term goals that matter to you and your loved ones down the line.
Remember your retirement goals.
Saving for retirement conjures up plenty of powerful emotions. You might worry that you won’t have enough funds to ever retire, or you might feel excited about the prospect of retiring sooner to live out lifelong dreams. No matter what your retirement goals look like, try to define them clearly and then formulate a plan to fulfill them. When you are feeling anxious, return to this plan to ground you.
For example, you can plan to use proceeds from your company stock to help fund tax-advantaged accounts such as a 401(k), IRA, backdoor Roth IRA, health savings account, or mega backdoor Roth. You could also use proceeds from your stock options to supplement your cash flow in order for you to be able to use some of your income to contribute to an employee stock purchase plan.
Above all, don’t hold company stock forever, expecting it to accrue enough value to fund your retirement. We all know the importance of diversification, and diversifying out of company stock — especially since your pay is also attached to this one company — is one of the best ways to prevent having all of your eggs in one basket. I have a client who learned this the hard way, faithfully holding onto his company stock from a previous job until it became worthless.
To say, “Don’t let emotions ever impact your financial decisions,” is like telling a grieving person not to be sad. Your emotions are your emotions, and you’ll feel them. That’s why removing emotion from decision-making takes a conscious effort, especially around a highly charged asset like employee stock options. Once you start to see these options for what they are — a part of your compensation that you can use at will — your financial outlook will suddenly feel a lot different.
