Copper Beech Advisors Blog

Understanding Executive Stock Options - Part III Cash Flow - Your Life

Posted by Timothy Caban on Aug 14, 2015 10:00:00 AM


At the end of the day, your life does not fit any perfect guidelines as you encounter the ups and downs that make life interesting.  Being prepared for both is fundamental to financial piece of min20150813_Cash_Flow_Your_Life_Imaged and to being confident that you are able to handle every situation.  Cash flow is where the rubber meets the road.  How you use it determines how well prepared you are.

But how does this fit into a Stock Options discussion?  In the first part of this series we looked at how to use stock price to make the best decisions about when to exercise your options.  In the second part we added taxes to the mix, showing you how to use the flexibility of owning executive stock options to achieve the best tax result. 

Now we will add the last key to the puzzle.  Making sure that your life is integrated with your stock options decisions to give you the greatest peace of mind and least amount of stress.  

Three Key Factors

  1. Stock Price
  2. Taxes
  3. Cash Flow - Your Life

Reserve Fund

Cash Flow is the primary concern as it's what you use to live on a day to day basis.  Having an appropriate reserve, outside of the money that comes in and goes out every month is your first line of defense to life's unexpected events.  Don't have a reserve fund?  You're susceptible to having to rely on credit cards which is a first step on the road to financial stress.

If you have a steady job and get paid on a W-2, then 10% of your gross income is a good baseline to think about.  If you make $200,000 as a household, that means having $20,000 set aside in a savings account.  If you are self-employed or retired, that number might be higher depending on your situation.


Are you on track to reach retirement on your terms?  Knowing the answer to this is the second important thing to consider when making decisions about your stock options.  To illustrate the point, let's look at two extreme cases.

If you know that it costs you $100,000 to live and you happen to have a nest egg of $10,000,000 because you just won the lottery, you have also won the game of life.  If you handle this money responsibly, you won't run out of money.  This situation would allow you to hold onto your stock options longer and "let them run" so to speak.  You can afford to try to get every last penny out of the stock price appreciation because don't need the stock options to live on.

In the opposite case, you have the same $100,000 living expense, but have only saved $100,000 toward retirement.  Being able to survive for the rest of your life on your nest egg is far from certain.  If you have the same exact stock options, this situation would dictate being more conservative as you decide when to sell.  You would want to be satisfied with a more modest appreciation in the stock and exercise your options sooner to help build your net worth.  The old saying "a bird in the hand is worth two in the bush" applies here.

On Track?

You likely don't fit either of these cases which is a good thing.  Most people have made some progress toward their retirement and are trying to chart a stable course to make sure that they reach their goals. 

Knowing whether you are on track or not is a key factor in stock option decisions and  in retirement decisions.  If you don't know whether you're on track or not, we can help.



Topics: Spending Control, Stock Options, Cash Flow