If you find yourself working at a company like NVIDIA, congratulations – you’re in an enviable position. Not only has your salary likely increased, but the value of your stock options has probably surged, adding significantly to your net worth. So, what do you do now that your financial situation has dramatically improved?
I often work with clients who are facing this exact scenario, whether it’s from equity compensation, owning a business, or similar opportunities. Here’s how I guide them through this life-changing moment.
1. Be Aware of What’s Ahead
If you’re receiving a large amount of RSUs (Restricted Stock Units), ISOs (Incentive Stock Options), or NSOs (Non-Qualified Stock Options), it might be time to diversify your holdings. It’s important to remember that you’re already exposed to the performance of your company’s stock. While it’s tempting to hold on to what’s been working, having more equity coming in future years presents an opportunity (or risk) that’s worth considering.
The goal isn’t to sell off everything, but to take some profits and reduce your concentration in a single stock. By doing so, you can protect yourself from potential downturns while still benefiting from future stock growth.
2. Plan for Taxes
When you decide to sell your stock, the tax implications will be significant. One strategy is to sell gradually over 2-4 years, spreading out your tax liabilities instead of taking a huge hit in one year. Tax loss harvesting is another option, which involves selling other investments that are down to offset gains. Direct indexing is a great way to do this.
Alternatively, you could donate some stock to a donor-advised fund before selling it. This allows you to avoid paying capital gains taxes and get a tax deduction. Other strategies, such as using trusts or qualified opportunity zones, can also help reduce your tax burden.
The key is to be proactive about your tax planning and act sooner rather than later.
3. Define Your Financial Goals
What are your financial priorities now that you have a wealth boost? Whether it’s buying a new home, saving for your children’s education, or purchasing a new car, having clear goals can help guide your decision to diversify. It’s often harder to sell your stock just for the sake of diversifying, but if you have a tangible reason behind it, like funding a major life event, the decision becomes much easier.
4. Develop a Reinvestment Strategy
Once you sell some of your company stock, where will you reinvest that money? Many people move their funds into index funds, such as QQQ or VOO. But remember, if your company stock has been a significant part of the index already, you don’t want to diversify only to end up with a similar concentration of risk.
Carefully consider how and where to reinvest to truly reduce exposure to your company while ensuring continued growth and diversification of your assets.
5. Take Advantage of Tax-Advantaged Accounts
If you haven’t been maximizing contributions to tax-advantaged accounts, such as your 401(k), your spouse’s 401(k), or Roth IRAs, now is the time to start. Consider using some of the profits from your stock sale to fund these accounts, which can provide long-term tax benefits.
The power of these accounts is incredible. By contributing $50k+ annually to Roth accounts, you can set yourself up for massive financial growth down the line. Don’t let this opportunity pass by; make this a regular part of your financial strategy.
6. Upgrade Your Insurance Coverage
As your wealth grows, so does your vulnerability to lawsuits. It’s crucial to upgrade your insurance coverage, including homeowners and auto insurance, and then add an umbrella policy for extra protection. This additional layer of coverage can help safeguard your assets in the event of unforeseen circumstances, like an accident or legal dispute.
Conclusion
Going from financial stability to wealth in a short period of time can be overwhelming, but it’s a situation that many of my clients have experienced. The key is to stay calm, plan carefully, and take advantage of the strategies outlined here. By being thoughtful about your financial moves, you can preserve and grow your newfound wealth for the long term.