Natalie and I celebrated the holiday season in 2019 by ourselves. It was the first time we had been away from family over the holidays and we realized how much free time that provided. On Christmas Eve, we decided to go for a hike along the Columbia River Gorge. The views were spectacular and the weather was everything you would think the Pacific Northwest would provide in the winter months. We reached our summit, overlooking the entire gorge. It was absolutely beautiful. As I was taking in the views I heard Natalie say, “sometimes you just need to take a leap of faith”. Immediately I started worrying about what dangerous move Natalie was about to do next (she gets a little too close to the edge for my taste). I quickly looked over and to my surprise, she was still standing right by my side. We laughed as I told her, “I thought you were going to do something crazy!” She told me that she meant taking a leap of faith by quitting our jobs and starting our business.
Fast forward two years later and the world looks completely different. The pandemic has shifted the mindset of our entire labor force. According to the Wall Street Journal, 7.5 million American workers quit in April and May collectively, which is an increase of 4.3 million from a year prior. Earlier this month the Department of Labor noted that unfulfilled job openings rose to a seasonally adjusted 10.1 million in June. Microsoft research finds that 41% of the global workforce is thinking about leaving their employer this year. According to a Gallup analysis, the engagement rate of our workforce is at 20% which is causing many of us to reconsider our career options. The pandemic has caused us to reevaluate our work-life balance, the time we spend on our daily commute, what greater flexibility in our daily schedule really means, and given us time to work on passion projects. I know many of you reading this have already taken your own leap of faith. For those of you still thinking about it, let’s talk about the financial considerations you should be aware of before joining in on The Great Resignation.
This was an extremely important question we were asked early on in our business. How long were our monetary resources going to keep us afloat both from a business and personal perspective? We managed to save a year’s worth of personal and business expenses prior to opening our doors. This allowed us to avoid taking on any unnecessary debt or needing to access capital from outside investors. Self-funding was very important to us as a boutique firm. We understood what we wanted out of all of this and where we wanted to go from the early days.
Luckily for me, Natalie is a rockstar when it comes to managing cash flow, as many of you have experienced. We had a clear understanding of our cash inflow and cash outflow prior to quitting our jobs. It’s the crux of what allowed us to find flexibility in the long run. Check out how we set up our cash flow, bank accounts, and budgeting in our blog, How to Structure Bank Accounts to Make Budgeting Easier.
We always recommend maintaining 3-6 months of living expenses in your emergency fund. Leaving your job is exactly what qualifies as an “emergency”. Some may argue that quitting by choice is different than getting terminated. No matter how you slice and dice it, you are not receiving a paycheck anymore and that warrants tapping into your emergency fund. By creating an appropriate emergency fund balance, you are granting yourself more time to figure out what your next chapter will entail.
Vesting refers to your ownership of various investment vehicles offered through your employer. The most common types of vesting that we see are related to your employer retirement plan such as your 401(k), stock options, and restricted stock units (RSUs).
Vested 401(k) Balance
The money that you contribute to your 401(k) through your paycheck belongs to you and you are able to transfer that balance to a corresponding Traditional IRA or Roth IRA or transfer to your new employer’s retirement plan when you leave. Vesting occurs with your employer match. Some companies allow for 100% vesting immediately, meaning should you leave, you would be eligible to keep your employer’s matching contribution. Other employers mandate a vesting schedule. For example, if your company has a 25% vesting schedule then you would not be eligible to keep 100% of their contributions until you have been employed for 4 years. If you left after year 2, then you’d have rights to 50% of your employer’s matching contribution. Take time to review the unvested dollar amount that you may be leaving on the table.
Vested Stock Options
Stock options allow you to purchase shares of your company’s stock at a set price in the future. You can only exercise vested stock options. The most common type of stock option vesting we see is time-based. For example, Natalie started at XYZ Inc. in June 2019 and was granted 1,000 stock options. The stocks options vest over a 4 year period or 25% per year. If Natalie left her job in August 2021, she then forfeits her unvested options of 500 (2022 and 2023). Let’s say Natalie had not exercised any of her vested stock options (2020 and 2021) at this point. She is then given 90 days to exercise any of her vested 500 stock options, assuming the share price is higher than the grant price. 90 days is what we typically see when it comes to exercising vested options should an employee leave a company, however it is extremely important to read your stock option agreement!
Confused? We can help analyze what’s rightfully yours when it comes to employee stock compensation. Let’s talk!
Restricted stock units are similar to stock options in the sense that they follow a time schedule or milestone schedule. When your company RSUs vest, you own the shares and decide to either sell or hold on to the shares. The difference between RSUs and stock options is that your shares do not need to be higher than the grant price (known as “in the money”). Should you leave your company then you are able to hold onto your vested shares, however, any unvested shares are forfeited. If you have questions on whether or not you should hold or sell your company RSUs, read our blog, Should I Sell or Hold My RSUs?
If you and your partner are both about to up and leave your companies, then I suggest we talk in a little more detail offline. For those of you with a spouse still employed and covered under benefits, then know that a loss of a job is typically viewed as a qualifying event meaning you get to go on your partner’s insurance within a set timeframe. Make sure to contact your HR to confirm this! If your partner adds you to their health insurance, then you should note the premium is likely to increase due to a spousal surcharge. The other options with health insurance are to see what rates are on the open market or stay on your employer’s coverage for an extended period (18 months). With the latter, you will be responsible for 102% of the premium cost. The extra 2% is added for administrative costs.
When Natalie and I first started dating we heard that “we were in the puppy dog phase”. When we first got married we heard that “we were in the honeymoon phase”. Luckily we don’t feel like anything has changed, regardless of what phase we are in. The same analogies can apply to the next chapter of your professional life. We are often looking for change professionally if our current environment doesn’t allow for growth or if we see flaws within the company we work for. When we find a new job the beginning phase is met with excitement, however that excitement can eventually change into newfound disengagement.
The most important lesson I’ve learned from changing jobs and starting a business from scratch is that identifying the greater purpose of what you are doing is more valuable than chasing the money. If it is more money that gravitates you toward change, then you need to ask what is it providing me/(us) that I/(we) didn’t otherwise have?
Understanding your household finances and setting your financial plan up appropriately allows for greater flexibility. Most importantly, it allows you to spend more of your time concentrating on excelling in your next chapter.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.