For many of us, Spring is a time of renewal and fresh starts. It is also frequently a time for bonuses. If you’ve had a successful year, you’ve hit your metrics, and bonuses are part of your compensation plan, here are some key issues for you to think about before your bonus is deposited into your bank or brokerage account.
1. It’s not free money
I know, it feels like free money. It’s not. You’ve earned it. It’s a little different in that it shows up in your account in a different way, at a different time, and a different amount.
2. Have a plan
The best way to move forward is to have a plan for the funds before you receive them. This can include a variety of things like a special treat for yourself, such as a vacation. Some other items to consider: making a contribution to your emergency savings fund, paying off debt, making an additional contribution to your retirement account, saving for your child’s college, or making an extra payment on the house.
3. Cash vs. Stock Options
Sometimes you get to choose: cash or stock options. Hmm. What should you do? It depends on your individual situation.
First, realize that when you receive stock options, you are not receiving stock. You are receiving an option to purchase the stock at a specific value. You’ll have to “exercise the option” to receive the stock. Then to receive cash, you’ll need to sell the stock. As you can see, choosing to receive your bonus in stock options indicates that you are betting positively on your company—which is probably one reason you chose to work for this employer. Specifically, you’re betting that their stock price will increase. You’re also indicating that you may not need the cash: that you’re willing to wait for the stock price to increase, while the option vests, usually from 1 to 5 years.
However, if your circumstances are such that you need cash in the short term, stock options may not be the right way to go. Perhaps you want money for the down payment on a home, or you’re paying tuition for your child, or your emergency fund needs replenishing. If this is your scenario, choose cash over stock options.
4. Restricted Stock Units vs. Stock Options
Many companies are moving away from stock options to restricted stock units (RSUs). To make the right choice, you should know a few differences between stock options and RSUs. As mentioned above, a stock option is a right to purchase the stock at a specific price. If the stock value never reaches the option price, the option is worthless. However, RSUs become stock and are valued on the day they vest. Additionally, stock options and RSUs are taxed differently. Stock options are taxed as income when you exercise the option. You are in control. RSUs have a vesting schedule. They are taxed when they vest and become stock. You can then choose to sell or keep the stock. These are a couple of things to keep in mind when choosing between RSUs and stock options.
5. Check with your Financial Advisor
Making these choices and using your bonus to support your financial goals can be overwhelming. Don’t hesitate to speak to your Certified Financial Planner™. A financial planner will be able to help you incorporate your bonus into your comprehensive financial plan.