At Merriman, we take our clients through a discovery process to learn about goals and lifestyle. Through that process we often discover total income may be made up of more than just a salary. To ensure our clients are hitting all their savings goals for early retirement, vacations and higher education, we need to create a plan for how to use multiple sources of income. For example, we may need to figure out what to do with RSUs, how to effectively use an employee stock purchase plan (ESPP) and how to invest annual bonuses. Mapping out a month-by-month plan helps our clients get organized and feel confident they’re taking the right steps toward saving enough and achieving their goals. Having this peace of mind allows guilt-free spending with the money that’s left over each month.
I recently met with a couple, Scott and Julie, who needed help creating a plan for their monthly cash-flow needs. At first, putting together a monthly budget seemed simple enough, but for Scott and Julie, it became clear it would be more complex because of their different income options. We had to figure out what to do with their income from salary, when to sell RSUs and how to take advantage of their company’s ESPP.
To create a plan that balanced their income vs. expenses, we took a three-step approach.
Step 1: Optimize savings options.
- Each contributes $19,000 per year to their 401(k).
- Each contributes to their ESPP to take advantage of the discounted share price.
- Each makes contributions into their after-tax 401(k) so they can take advantage of the Mega Backdoor Roth. (Note: This is not available at all companies.)
- They contribute monthly to a 529 college savings plan for their two kids.
Step 2: Calculate what the income gap is each month.
After they meet their savings goals, pay their taxes and take care of other miscellaneous payroll items, their monthly income from their paychecks equals $10,000.
Their monthly expenses are -$15,000, so this leaves them with a monthly deficit of -$5,000.
Step 3: Sell RSUs and ESPP shares to supplement income.
Below is a spreadsheet that shows a month-by-month cash-flow plan for their “spending bucket,” which is their checking account. Notice we first filled the bucket with $50,000. This initial $50,000 came from the sale of some of their RSUs. At the beginning of each month, you can see the starting amount gradually go down. We refill the bucket every quarter by liquidating more RSUs, and then every six months we sell shares in their ESPP.