5 Mind-Altering Wealth Strategies for Successful Business Owners

I’m an entrepreneur and just so happen to be in the business of providing other entrepreneurs with financial advice. But I don’t typically offer up the usual status quo advice that tells you to do things that aren’t always in alignment with growing your business.

My views originate from my experiences and at times are contrarian to what’s being recommended by the usual tax preparer and other financial advisers, because I am in the trenches running a business just like you. I know what it takes to grow a business, make payroll, deal with IRS notices and manage cash flow.

The truth is that being an entrepreneur can be isolating at times as a result of being wrapped up in the day-to-day of running your business. When you are hyper-focused on your business, it is difficult to also be an expert at managing the profits of the company.  You may be great at making money, but once it’s made, what do you do with it?

Thinking differently about your company and how you will use it to build wealth is the key to true financial success.

In this article, I’ll outline five ways you can shift your mindset about money to transform how you define and operate your business and approach your financial decisions. It will help you identify what you really want to achieve: A Self-Managing Company®, a term coined by  Dan Sullivan of Strategic Coach.  

Mind Shift No. 1: Understand that Retirement Savings Plans Don’t ‘Lower’ Your Tax Bill

As a business owner, you are probably time-starved and used to making fast decisions. And you may be tempted to make fast decisions at tax time, especially when your tax preparer suggests that tax-deferred investments are the answer to lower your tax bill and save some money for retirement.  Easy enough, right?

This is what I like to call a half-truth. It’s true that you’ll get the deduction for that year’s taxes. But the other half of the story uncovers the problem with the use of SEP IRAs, 401(k)s and other tax-deferred options to “lower” your tax bill. The reality is that you are taking money from your business where you have some level of control and redirecting those dollars into the stock market where you have absolutely no control.  The money is tied up until you are 59½ years old and face potentially higher tax liabilities than you previously owed with no access to your cash if it is needed for growing or sustaining your business.

When you own a business, the half-truths you hear from many finance professionals and the mainstream media can at times negatively impact your ability to grow your business and protect your interests.  I have found there are other, more productive ways to build wealth outside of your business, beyond the base-level concepts of investing or putting money in an IRA or 401(k).

Mind Shift No. 2: View Your Company Not as Your Job, but as a Tool for Building Your Wealth

If you run a healthy business, you have a long-term strategy. You know what the end-goal is. You think about the business as a whole, rather than focusing on simply the day-to-day tasks.

We’ve all heard the old adage: Work on your business, not in your business. That’s because if you’re working in your business all the time, you’ve only created a job for yourself.  The goal is to build systems and develop people to slowly work yourself out of the role you have and allow the business to run on its own.  The sooner you shift your mindset to this way of thinking, the sooner you can begin to experience the results.

First, carve out the time in your day to think about your business. Many business owners I talk to don’t do this, because they are buried in the work. Take time to talk to your future self about what you want your life to look like in the future.  What would your future self say to you about the decisions and choices you are making?  It helps to outline your thinking time, keep a journal of your discoveries, meditate to de-stress, and use the time to reflect on what you are trying to accomplish in the business.

Next, think about your business as a piece of your financial plan. How much time and capital are you investing into the business, and what are you getting out of it?  What is your ROI?  I’ve found that a business can offer the biggest opportunity to build wealth, and in many cases — depending on your results — it can offer more than what you might get from investing in the market.

Finally, think with the end in mind. At the end of the day, what are you trying to get out of your company? To build wealth through your business, you must identify what will build its value.

Building value revolves around creating a self-managing company, one that runs without you and has a strategy to sustain itself into the future. This allows you to sell it for maximum value, or even create a passive income stream without actually having to work in the business.

Shifting your mindset is important, because you probably didn’t start your business that way. Many business owners don’t, and that’s OK while you’re getting things up and running. But it’s important to remember that what got you started will not get you to the next level and will not build the wealth needed to successfully exit the business.

Mind Shift No. 3: Master Your Cash Flow

I tend to bust a lot of myths when it comes to financial matters, and one of them has to do with cash flow. This is especially important to understand as an entrepreneur. Your cash flow is not there to simply pay your bills. Yes, you must pay your bills of course, but there is more to it than simply making payroll.

Cash flow is a tool to help you build wealth and the value of your company.  Healthy cash flow allows for you to control your money, and there are strategies you can explore to help you maximize it.

I recently spoke with a partner of a business who was earning a W-2 salary of $400,000 per year. In working with his CPA, we were able to rework his partnership agreement, removing him as an employee and adding him as a consultant of his own LLC.  While this simple strategy reduced his tax liability by $20,000, implementing this strategy was about more than just lowering taxes.  This was about cash flow – everything is always about cash flow.  By making this little tweak, he increased his cash flow by $1,666 per month.

I’m not a CPA and don’t provide tax advice, but I ask a lot of questions and propose many scenarios for the tax professionals to consider – scenarios that can increase cash flow for business owners. Increasing and optimizing your cash flow should be a top priority for your business.

Mind Shift No. 4: Be Your Own Bank

Companies with cash are able to do many things without having to rely on a bank or other source of funding. In essence, they can be their own bank. Think about it. When you have cash, you can use it to work on your wealth-building strategy. You could buy a company, invest in equipment, hire more people (maybe even a replacement for yourself who can run the company while you collect passive income), buy property, or take advantage of any other opportunity that may come your way.

But there is another way you can be your own bank. Maybe you’ve heard of the concept of “BUILD Banking™,” a cash flow strategy using a specially designed life insurance contract. It’s a strategy that I use personally and with many of my clients who want to have greater control of their cash flow. It frees them from dependence on banks for capital infusions and avoids government red tape when they need to access their money.

For more information about BUILD Banking™, visit www.buildbanking.com.

This strategy enables business owners to grow assets tax-free and have access to those funds whenever they’re needed. In essence, you’re accessing cash when it is needed while having uninterrupted compounding growth for your future.

Mind Shift No. 5: Understand Your Legal Exposures and Protect Yourself

You likely have some form, or forms, of insurance in place for your business. And you may believe that these policies have you covered. Well, they may, and they may not. The coverage you need goes far beyond liability, even extending into punitive damages.

It’s important to work with an insurance professional who specializes in business coverage to ensure that you have the right type of policies and the proper level of protection for your specific business.

There are also certain types of insurance policies (including the BUILD Banking strategy I’ve described above) that can serve a strategic purpose for your business. It’s common, and valuable, for business owners to have a life insurance contract as part of their succession plan, acting as a funding mechanism for the beneficiary to purchase the deceased owner’s share of the business.

Again, you will want to have a collaborating team of insurance professionals who have expertise in their vertical and who understand your business, your goals and what you are trying to accomplish. It’s also a good idea to include your CPA, attorney and financial planner in on those discussions.

These five financial planning tips and mindset shifts will help you use your business as a tool to start building wealth (or build greater wealth). They may be things you’ve never thought about, or things you’ve considered but haven’t been able to implement.  Putting these ideas to work can get you on the path to true business success.

Results may vary. Any descriptions involving life insurance policies and their use as an alternative form of financing or risk management techniques are provided for illustration purposes only, will not apply in all situations, may not be fully indicative of any present or future investments, and may be changed at the discretion of the insurance carrier, General Partner and/or Manager and are not intended to reflect guarantees on securities performance. Benefits and guarantees are based on the claims paying ability of the insurance company.
The terms BUILD Banking™, private banking alternatives or specially designed life insurance contracts (SDLIC) are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life insurance companies are the same as traditional banking institutions.
This material is educational in nature and should not be deemed as a solicitation of any specific product or service. BUILD Banking™ is offered by Skrobonja Insurance Services LLC only and is not offered by Kalos Capital Inc. nor Kalos Management.
BUILD Banking™ is a DBA of Skrobonja Insurance Services LLC.  Skrobonja Insurance Services LLC does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal adviser for such guidance.

Founder & President, Skrobonja Financial Group LLC

Brian Skrobonja is an author, blogger, podcaster and speaker. He is the founder of St. Louis Missouri-based wealth management firm Skrobonja Financial Group LLC. His goal is to help his audience discover the root of their beliefs about money and challenge them to think differently to reach their goals. Brian is the author of three books, the Common Sense podcast and blog. In 2017 and 2019 Brian received the award for Best Wealth Manager and in 2018 the Future 50 St. Louis Small Business.

Source: kiplinger.com

From Bitcoin to GameStop to SPACs: 8 Tips for Mania Investing

Market speculation is seemingly everywhere.  From new SPACs being issued, to the prevalence of Reddit stocks such as GameStop to the popularity of electric vehicle stocks and the rise of cryptocurrency – speculation is alive and well in the markets today. 

“Mania” is a good word to describe the energy surrounding these types of investments.  Dramatic daily swings are the new normal in these holdings.  Hollywood elites and business moguls are attaching their names to crypto and the latest SPAC investments. 

The top mania investment areas are electric vehicles, cryptocurrency, Reddit stocks, space, SPACs, precious metals and pot stocks.  The dictionary definition of mania describes “excessive or unreasonable enthusiasm.”  That seems about right.  The result has been a meteoric rise in value not tied to business fundamentals but tied to hype, expectations or projections. 

Investors looking to boost performance often wonder how much exposure to these types of investments should they have.  With strong appreciation in some of the holdings, it is tempting to get into the game.  Here are our top eight tips for mania investing. 

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1. Admit that it is a mania

A woman is swept away on waves of water.A woman is swept away on waves of water.

Have some honest reflection about the investment environment you are in.  Mania investing can be fun, it can be thrilling and, ultimately, it can be painful.  But mania investing is not your conventional long-term investing strategy.  Admit you are being swept up in a mania and acknowledge what that might mean regarding your tactics.  It’s impossible to explain to yourself or your friends the fundamentals of a company with no earnings, so stop trying to make sense of it.  It is a mania, not an investment based on fundamentals. 

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2. Have an exit strategy & set a price target

Price tags.Price tags.

How far are you willing to watch your investment drop before you pull out?  Set a price target and stick to it.  Some of the biggest mistakes happen with investors who fall in love with a company or a product and hold it while closing their eyes.  Mania investments are not typically long-term plays, and you must plan for how much risk you are willing to take.  Set a target to get out and limit your downside exposure.

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3. Limit your overall portfolio exposure

A colorful pie chart.A colorful pie chart.

If you are going to be a mania investor, maybe you limit your exposure to 3%, 5% or 10% of your total portfolio.  Understand it is the high-risk portion of your portfolio and do not allocate more than you are willing to lose.  The older you are and the closer to retirement, the less you can afford to lose.  The younger you are, the more you might be willing to allocate to more aggressive strategies. 

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4. Diversify your manias 

A woman balances a bitcoin on a red tightrope.A woman balances a bitcoin on a red tightrope.

Maybe you like cryptocurrency — go ahead and invest in it, but buy into three different types, instead of just one, to diversify.  Maybe you like electric vehicles. If so, consider adding some exposure to space or precious metals as well.  Even in your mania investing, you do not want to concentrate all that allocation to just one mania strategy.  Diversification can help reduce risk even in a risky space.  Although, be careful of too much diversification.  In a world like electric vehicles, there is a possibility of there being few winners and many losers. 

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5. Understand performance in context 

Woman standing under an orange umbrella in the rainWoman standing under an orange umbrella in the rain

The S&P 500 10-year average over the past 100 years is around a 10% return per year.  Warren Buffett has averaged about 15% per year.  If your mania investments have made 100% in a year, understand how rare that is and that the odds of duplicating that performance year after year are incredibly remote.  Part of good investment performance is not just making money in good times, but also weathering losses during challenging times. 

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5. Know the difference between investing and speculating

A stack of gambling chips tumbles over.A stack of gambling chips tumbles over.

Investing for the long term carries its own set of disciplines and rules and expectations.  Mania investing is more akin to speculating or even gambling.  It often has dramatic movements in price over a short period of time.  It might include hype in the media, memes on social networks and inexperienced people giving investment advice.  Be careful and realize speculating is a high-risk game — it is not the same as sound investment on fundamentals.   

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6. Take some winnings off the table

A man cashes in his gambling pot.A man cashes in his gambling pot.

Maybe you own one of the stock names that have doubled or tripled in value over the past year.  Consider selling some of the holdings and locking in your gains.  Maybe reduce your exposure by 50%.  Keep some of the holdings a bit longer, but diversify into something more stable or consistent.  Setting a price target on the upside can be just as important as setting one on the downside. 

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7. Do not gamble the farm

The sun sets over the red barn of a farm.The sun sets over the red barn of a farm.

A smart gambler, if they go to Vegas, will set their own personal limit on what they are willing to lose.  Whether that is $100, or $10,000 — set a limit when it comes to mania investing.  Also, do not raid all your retirement money on a whim to chase manias.  While a portion could make sense, the lion’s share of your retirement should be focused on fundamental investment strategies that are consistent.  Pulling all your retirement money to buy into different manias would likely be a crazy idea, just like putting your house keys in the pot of a poker table would be ill advised. 

Investing in some of these sexy stocks and industries has appeal, and there is money to be made.  But there is also money to be lost, and it is important to have a rule set for investing even if you are investing in mania stocks.  Finally, know how risk taking can fit in your overall financial plan and realize that the risk you are willing to tolerate is likely to be different from someone else. 

Investing carries an inherent element of risk, and it is possible to lose principal and interest when investing in securities. Strategies are used to assist in the management of your account. Even with these strategies applied to the account, it is possible to lose money. No strategy can guarantee a profit or prevent against a loss. There may be times when the strategy switches between equities or fixed income at an inopportune time, causing the account to forfeit potential gains.

CEO – Senior Wealth Adviser, Sterling Wealth Partners

Scot Landborg has over 17 years of experience advising clients on retirement planning strategies. Scot is CEO and Senior Wealth Adviser for Sterling Wealth Partners. He is host of the retirement planning podcast Retire Eyes Wide Open. Scot is a regular contributor to Kiplinger.com and has been quoted in “U.S. News & World Report,” Market Watch, Yahoo Finance, Nasdaq and Investopedia. He also formally hosted the nationally syndicated radio show “Smart Money Talk Radio.”

Investment Adviser Representative of USA Financial Securities. Member FINRA/SIPC A Registered Investment Advisor. CA license # 0G89727 https://brokercheck.finra.org/

Source: kiplinger.com

Why Today’s Retirees Need to Pursue Tax-Minimization Strategies

Today’s retirees face many obstacles, from an unpredictable market to a lack of guaranteed income in retirement. While these are important challenges to address, they would be remiss to ignore their future tax burdens. We’ll likely see increased taxes in the future, and this will affect today’s retirees more than tax increases have affected retirees in the past.

Retirement Then vs. Now

Today’s retirees are the first IRA generation: Whereas previous generations could primarily rely on Social Security benefits and pensions to cover their retirement expenses, many of today’s retirees find themselves having to fund a much larger portion of their retirement through their own pre-tax retirement accounts. And while retirement accounts such as 401(k)s and IRAs have significant benefits, they also come with downsides, namely that all of the withdrawals in retirement are taxable as ordinary income at the current tax rates in our country.

This means that if tax rates were to rise, the retiree living off of IRAs will have to pay more in taxes and therefore live off of less after-tax income. Previous generations saved their money in after-tax accounts, meaning if tax rates were to rise, it would not affect them the same way it will for this IRA generation. When we look at the history of taxes and the Biden administration’s tax-increasing proposals, it’s clear that retirees need to have a tax-minimization plan.

Could We See Taxes Increase?

We need to plan for the tax rates of the future, not the present. Previously, tax increases primarily affected wage earners. The Social Security payroll tax and income tax increases had little effect on Social Security beneficiaries and retirees who saved in after-tax accounts. However, those who take distributions from a tax-deferred retirement account and who invest in the market are affected by both income tax increases and new taxes.

These could include:

  • The possible elimination of the favorable long-term capital gains taxes rates for the wealthiest investors. This could mean those with incomes of $1 million or more might pay up to 39.5% on their gains, rather than the current top rate of 20%.
  • Lowering of the current standard deduction. Many retirees don’t itemize their deductions and rely on the standard deduction.  Therefore, if the current standard deduction is lowered, people’s taxes could go up.
  • Imposing the Social Security payroll tax on workers or households earning over $400,000 annually. This tax — in which employers and employees each pay 6.2% and the self-employed pay the full 12.4% — helps pay for Social Security benefits.
  • Lowering the federal estate tax exemption amount, which could affect estates above about $5 million.

Retirees should note that we may be experiencing tax rates at 100-year lows now, and that this could end in light of recent increased government spending. Our already large national debt increased during the pandemic, with the CARES Act of 2020 costing $2.2 trillion and the American Rescue Plan Act of 2021 costing $1.9 trillion. We will have to pay for this eventually, and retirees with large tax-deferred IRAs could be the ones to do it.

When we look at history, we see that after a period of increased government spending during World War II, income tax rates in the following decades were much higher than they are now. In 1944, the top rate peaked at 94%, and by 1964 it had only gone down to 70%. This doesn’t mean that an individual’s tax bracket will go from 22% to 70%, but there is a lot of room in between where retirees could feel the effects.

When running a financial plan, retirees need to calculate how much taxable income they will have and how much of that will be left after taxes. If tax rates rise, retirees could need to withdraw more from their taxable retirement accounts to be left with the same amount of income, ultimately drawing down their savings faster.


Taxes on retirement income can become more burdensome starting at age 72. Most retirees must take RMDs (required minimum distributions) from their traditional retirement accounts starting at age 72, and the amount they must withdraw is based on their age and account balance.

RMDs could force someone to withdraw more than they normally would from their tax-deferred retirement account, causing them to jump into a higher tax bracket. Retirees under the age 72 should look to do careful planning that may minimize this effect by the time they reach this age.  (Keep reading for an idea on how to help do that below.)

Taxes and Your Legacy Goals

RMDs can also potentially increase a beneficiary’s tax burden due to the SECURE Act passed in 2019. It ended the “stretch IRA,” which allowed beneficiaries to stretch out distributions from an inherited retirement account over their lifetimes. Now, most non-spouse beneficiaries must empty traditional accounts within 10 years of the original owner’s death.

Those who want to pass on their retirement accounts should consider tax minimization strategies when creating an estate plan. One possibility is a charitable remainder trust.

What Can Retirees Do Now to Prepare for Higher Taxes Later?

Those who will draw a significant portion of their retirement income from taxable retirement account should take note, and work to minimize their overall tax burden. There are many strategies they can employ, including converting part or all of their traditional 401(k) or IRA to a Roth IRA. This involves paying tax on the amount converted and eventually withdrawing it from the Roth tax-free. If we see taxes increase in the future, a Roth conversion at today’s rates could potentially be a good strategy for those whose tax burden won’t substantially decrease in retirement.

In addition to providing tax-free income, a Roth is also exempt from RMDs. This means that the money in a Roth IRA can continue to grow throughout the owner’s lifetime tax-free. When it’s inherited, the beneficiary will have to drain the account in 10 years, as with a traditional IRA. However, distributions from traditional IRAs, distributions from Roth IRAs are not taxable and will not incur an early withdrawal penalty as long as the account is at least five years old.

The Bottom Line for Retirees

Retirees who have both traditional and Roth IRAs can strategically withdraw from each to avoid going into a higher tax bracket, continue to reap the tax-advantage benefits of a retirement account after age 72, and pass on potentially tax-free wealth to their beneficiaries. Those who think tax hikes are on the horizon and who don’t plan to live on significantly less income in retirement should consider tax-minimization strategies such as a Roth conversion.

Investment Advisory Services offered through Epstein and White Financial LLC, an SEC Registered Investment Advisor.  Epstein & White Retirement Income Solutions, LLC is a licensed insurance agency with the state of California Department of Insurance (#0K53785).  As of March 31, 2021, Epstein and White is now a part of Mercer Global Advisors Inc. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. The information, suggestions and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal, tax, accounting, or insurance purposes.  Epstein and White Financial is not a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Please consult with your own accountant and financial planning professional to determine how tax changes affect your unique financial situation. A copy of Epstein & White Financial LLC’s current written disclosure statement discussing advisory services and fees is available for review upon request or at www.adviserinfo.sec.gov.

Founder and CEO, Epstein and White Retirement Income Solutions

Bradley White is founder and CEO of Epstein and White. He’s a Certified Financial Planner™ and has a bachelor’s degree in finance from San Diego State University. He’s an Investment Advisor Representative (IAR) and an insurance professional.

Source: kiplinger.com

What is a Financial Coach?

If you need help getting your finances organized or setting up a plan to effectively work towards your financial goals, you might benefit from the help of a financial coach.

A financial coach works with clients to help them better manage their money and to develop healthy, long-lasting, finance-related habits.

These professionals can help clients pay off debt, create an emergency savings fund, stabilize their finances, and develop an overall plan to reach their financial goals.

Unlike financial advisors, financial coaches spend more time helping their clients understand the fundamentals of finances, rather than recommending investments and managing their investment portfolios.

Read on to learn more about financial coaches, what they do, how much they cost, and how to find one.

What Does a Financial Coach Do?

According to the Consumer Financial Protection Bureau , a financial coach is a trained professional who collaborates with and guides their clients to reach their financial goals, including:

•   Better money management skills
•   Improved savings, debt levels, and credit scores
•   More financial confidence
•   Increased goal attainment

Financial coaches typically individualize their approach based on the needs of each client, with the goal of helping them make progress in the area of their financial life that they identify as most important.

A financial coach can help you reach your financial goals by teaching you money management skills, such as how to build savings, avoid overspending, or pay down debt.

Financial coaches also often assist their clients with the behavioral and emotional components of managing money. A coach can help you uncover what drives your financial decisions, so you can create a healthier attitude that leads to better money habits.

Coaches often work with their clients over the period of several weeks to several months, and may meet with weekly or biweekly to provide advice and check on progress.

The full coaching process typically consists of a series of steps that may include: building awareness around spending habits (usually by tracking daily, weekly and monthly spending), defining the client’s financial goals, and developing a budget and a financial plan to achieve those goals.

Accountability is typically built into the process—so, rather than managing a client’s person’s finances, a financial coach gives clients the tools to help make informed and responsible financial decisions.

What a financial coach can’t do: offer investment recommendations or help clients manage their investment portfolios.

While coaches can provide basic advice on the concept of investing, they are not licensed to provide financial advice like financial advisors are, and therefore cannot provide specific product recommendations.

How Much Does a Financial Coach Cost?

Unlike financial advisors, who typically charge their fees based on a percentage of the assets under management, financial coaches generally work on a fee-only basis

Some may charge a flat fee based on how long you plan to work together (such as three or six months), while others might charge per session.

Coaching rates typically run between $100 to $300 an hour. But because of the wide range of fees charged by coaches, it’s a good idea to ask about costs upfront.

How do I Find a Financial Coach?

While there is no required coursework or license, and there are no certifications to become a financial coach, there are training programs run by the Association for Financial Counseling and Planning Education (AFCPE) .

You can begin looking for financial coaches in your area through the AFCPE website. It’s also a good idea to ask for personal referrals from friends and family, as well as other financial professionals you know or work with (such as an accountant or financial advisor).

Before selecting a coach, it can help to consider specifically what you are looking for in a financial mentor. This can involve thinking about your own financial strengths and weaknesses, and what your goals are.

Are you, for example, struggling to save enough money for a down payment on a house? Or, do your credit card balances keep going up? Identifying your needs can help you suss out the best coach for your situation.

Once you have a list of financial coaches, you may want to reach out to each candidate to get a sense of their personality, methods, and coaching style.

Some questions to consider asking:

•   How long have you been a coach?
•   What’s your business specialty?
•   How long do you typically work with clients?
•   What’s your plan to help me reach my goals?
•   What is your availability?
•   What are your fees?

The Takeaway

Maybe you’ve tried to make a budget, but just can’t stick to it. Or, perhaps you’ve run up so much debt between credit cards and loans that you don’t know the best way to pay it off.

A financial coach can help you structure your budget, build a financial plan, and hold you accountable throughout the process.

Financial coaches can also help clients understand and work through deep-seated emotions around money that may be preventing them from reaching their financial goals.

If you’re looking to better manage your money or simplify your finances on your own (or before meeting with a financial coach), SoFi Money® can help.

SoFi Money is a cash management fund that allows you to earn, spend, and save–all in one place.

Using the SoFi app, you can easily track your spending and saving, and even create separate savings “vaults” for specific financial goals.

Learn how SoFi Money can help you manage your finances today.

SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


Source: sofi.com

How Are Employee Stock Options and RSUs Different?

Two of the most common employee stock plans, employee stock options (ESOs) and restricted stock units (RSUs), both give you the chance to eventually become a shareholder in your company.

While these benefits may sound very similar, there are significant differences between them. An employee stock option is the promise that at a future date, an employee has the option to buy company stocks at a certain price. A restricted stock option is the promise that at a future date (or upon the accomplishment of another milestone or benchmark), an employee will receive company stocks.

An employee stock plan may be offered to everyone as a companywide benefit. Other times, it’s a custom plan that’s baked into an executive job offer as either a recruitment and retention incentive, a way to cover the lack of cash flow in a startup, or both.

Sometimes, employees get a choice between ESOs and RSUs. Understanding how each stock plan works, how they differ, and exactly what the risks are with each can help you make a decision that best aligns with your financial goals.

This guide outlines the key features of ESOs and RSUs, and breaks down the differences between them, so you can better decide what’s right for you.

Employee Stock Plans: Key Terms and Phrases

Having a grasp of stock market vocabulary can help you decipher quickly what your employer is offering, the terms and restrictions, and whether it’s a good deal for you.

The Grant/Strike/Exercise Price

These are three different words with the same meaning: grant, strike, and exercise price all refer to the price at which your plan says you can purchase company stock. It’s most often based on the stock’s current market value.

If your strike price is 1,000 shares at $1 per share, for example, that’s what you’ll pay for those shares if you decide to exercise your stock options, regardless of their current market price.

Being ”In the Money” and “Out of the Money”

When the stock is currently trading above the strike price, it’s called being “in the money” and may mean big profits.

Conversely, if the stock’s market price falls below the strike price, your options are considered “underwater” or “out of the money” and don’t hold any value. In that situation, it may be cheaper to buy your company’s stock on the open market.

What Are Employee Stock Options (ESOs)?

An ESO is an option to buy shares in your employer company in the future for a price set today. The “option” part means you can buy the stock later if it suits you, but you aren’t obligated.

Unlike an outright stock purchase, an option doesn’t give you actual shares until you decide to buy them, which is called exercising. Another difference from a traditional stock purchase is that options become null and void if you don’t exercise your stock options before the expiration date.

How do ESOs Work?

Generally, ESOs operate in four stages—starting with the grant date (aka strike date or exercise date) and ending with the exercise, or actually buying the stock.

1. The grant date. This is the official start date of an ESO contract. You receive official information on how many shares you’ll be issued, the strike price (aka grant price or exercise price) for those shares, the vesting schedule, and any requirements that must be met along the way.

2. The cliff. If a compensation package includes ESOs, it doesn’t necessarily mean that they’re available on day one.

Contracts often contain a number of requirements that must be met first, such as working full time for at least a year. Those 12 months when you are not yet eligible for employee stock options is called the cliff. If you remain an employee past the cliff date, you get to level up to the vest.

3. The vest. When you pass your cliff date, your vesting period begins, which means you start to take ownership of your options and the right to exercise them. Vesting can either happen all at once or take place gradually over several years, depending on your company’s plan.

One common vesting schedule is a one-year cliff followed by a four-year vest. On this timeline, you’re 0% vested the first year (meaning you aren’t eligible for any options), 25% vested at the two-year mark (you can exercise up to 25% of the total options granted), and so on until you own 100% of your options. At that point, you’re considered fully vested.

4.The exercise. This is when you pull the financial trigger and actually purchase some or all of your vested shares.

One common timeline is 10 years from grant date to expiration date, but specific terms will be in a contract.

Pros and Cons of Employee Stock Options (ESOs)

If you land a job with the right company and stay until you’re fully vested, exercising your employee stock options could lead to instant, huge gains.

For example, if your strike price is $30 per share, and at the time of vesting the stock is trading at $100 or more per share, you’re getting a great deal on shares.

On the other hand, if your strike price is $30 per share and the company is trading at $10 per share, you might be better off not exercising your employee stock options.

Tax Implications of Employee Stock Options

Generally speaking, employers offer two types of stock options: nonqualified stock options (NSOs) and incentive stock options (ISOs). NSOs are the most common and often the type offered to the general workforce.

NSOs are subject to income tax on the difference between the exercise price and the market price at the time you purchase the stock. (ISOs are “qualified”, meaning you don’t pay any taxes when you exercise the options—only when and if you sell them at a profit later on.)

Any money you make above and beyond that if you sell your shares later can also be subject to the capital gains tax. If you hold your shares less than a year, the short-term capital gains tax rate equals your ordinary income tax rate, which could be up to 37% for the highest tax bracket.

For assets held longer than a year, the long-term rate can be 0%, 15%, or 20%, depending on your taxable income and filing status.

What Are Restricted Stock Units (RSUs)?

Restricted stock units, or RSUs, fall somewhere in between stocks and options—they are a promise of stock at a later date. When employees are granted RSUs, the company holds onto them until they’re fully vested.

The company determines the vesting criteria—it can be a time period of several years, a key revenue milestone, or even personal performance goals. Like ESOs, RSUs can vest gradually or all at once.

How Do Restricted Stock Units (RSUs) Work?

RSUs are priced based on the fair market value of the stock on the day they vest, or the settlement date. This means that you don’t have to worry about falling out of the money—the company stocks you receive from your company will be worth just as much as they would be if you purchased them on your own that same day.

As long as the company’s common stock holds value, so do your RSUs. Upon vesting, you can either keep your RSUs in the form of actual shares, or sell them immediately to take the cash equivalent. Either way, they will be taxed as income.

Pros and Cons of Restricted Stock Units (RSUs)

One good thing about RSUs is the incentive they can provide to stay with the company for a longer period of time. If your company grows during your vesting period, you could be very far in the money when your settlement date rolls around.

But even if the stock falls to a penny per share, they’re still awarded to you on your settlement date, and they’re still worth more than the $0 you paid for them.

In fact, you may only lose out on money with RSUs if you leave the company and have to forfeit any units that aren’t already vested, or if the company goes out of business.

Tax Implications of RSUs

When your RSU shares or cash equivalent are automatically delivered to you on your settlement date(s), they’re considered ordinary income and are taxed accordingly. In fact, your RSU distributions are actually added to your W2.

For some people, the additional RSU income may bump them up a tax bracket (or two.) In those cases, if you’ve been withholding at a lower tax bracket before your vesting period, you could owe the IRS even more.

As with ESOs, if you sell your shares at a later date and make a profit, you’ll be subject to capital gains taxes.

Feature ESOs RSUs
The benefit An employee can buy company stock at a set price at a later date. An employee receives stock at a later date.
The stock price The “strike price” is determined when ESOs are offered to an employee—even if they can’t purchase shares for a year or more (until they’re vested). The share price is based on the fair market value of the stock on the day they vest.
Tax implications The difference between the strike price and the stock’s value when you exercise your options is considered earned income and added to your W-2, where it’s taxed just like your salary. If you sell your shares later at a profit, you may also be subject to the capital gains tax. RSU shares (or cash equivalent) are considered ordinary income as soon as they are vested, and are taxed accordingly.

The Takeaway

Knowing how ESOs and RSUs work—and understanding the differences between them in terms of terms, pricing, and tax implications—can help you make an informed decision if and when you are offered one or both of these workplace perks.

Having the option to own stock in your employer company has the potential to provide attractive financial benefits, especially if you believe in the company and its future. However, one key investing strategy that many investors follow is portfolio diversification—making sure your investments are spread out across companies, industries, and assets.

Here’s why: Because if all your investments are in company stock and the business folds or takes a downturn, you risk losing both your salary and your stock.

With SoFi Invest®, members can Trade stocks, ETFs, crypto, and may be able to participate in upcoming IPOs—diversifying in a way that best suits individual risk tolerance, preferences, goals, and more.

Find out how to get started with SoFi Invest.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Source: sofi.com

Erin Lowry of Broke Millennial on Navigating Tough Money Talks

Talking about money with your loved ones can feel uncomfortable. It can be awkward. It can be so difficult that you just avoid bringing up the subject altogether.

But you’re not doing yourself any favors by putting off the conversation. You’ll have a hard time saving up for a house with your partner if you can’t confront each other’s poor spending habits. You don’t want weekly outings with friends raising your credit card debt because you don’t want to mention you’re on a tight budget.

Erin Lowry, a financial expert and founder of Broke Millennial, focused her latest book “Broke Millennial Talks Money” on the topic of navigating tough financial conversations. She recently joined The Penny Hoarder for an online discussion where she shared tips and advice.

The following is an abridged version of that conversation, edited for length and clarity.

10 Questions With Erin Lowry of Broke Millennial

1. Why is it important for folks to be open to talking to people in their lives about money, even when it’s awkward?

You can do everything right to build your financial house, but if you cannot communicate effectively, if you can’t set healthy boundaries and if you do not know how to engage in these tough financial conversations, it’s going to start to slowly crumble the foundation that is your financial house. It’s useful that we learn how to navigate awkward money conversations, because they’re going to keep happening through our entire lives.

2. Why do you think it is so taboo to talk about money?

Judgment. I really think that that’s the word that sums it up. Oftentimes, we are fairly comfortable talking about money with total strangers. I’ve had many — pre-pandemic — fun conversations on the airplane with people about their financial lives, especially once they find out what I do. And there’s no risk there. I’m probably never going to see them again, so people get really vulnerable and open. On the flip side, I’ve had friends and family members not as willing to be open because there is this feeling of: “Oh, am I going to be judged?”

3. What should you do if you want to have a money talk with someone but they’re very hesitant?

It depends on who the person is and why you’re trying to initiate the conversation. There’s a big difference when you and your partner are getting really serious and about to move in together. That’s then a necessity to be having the financial conversation.

But every so often I get messages that are like: “My best friend’s pretty crappy with money and I want to have a conversation with her about how to be better.” Well, listen, if she doesn’t come to you, if she doesn’t ask, it’s — at the end of the day — not necessarily your business to offer guidance and advice.

You really need to allow this to be a very collaborative conversation. Maybe you share something about your own success and that can open the door to being asked questions to initiate more conversation. But sometimes, it is very much a “not your business” situation and if you overstep boundaries, people are also going to get uncomfortable.

4. How do you know when you’re in the right place in your relationship to start talking about finances?

While I would love it if everybody on the first date was super comfortable baring it all, that’s just not realistic. What you can do is to start taking notice of context clues that you’re being given along the way. This includes comments that get made, ideas for how much you should be spending on dates or trips or presents to each other, where that person lives and what kind of car they drive. All of these are giving you signals about how they value things, how they spend their money and either how much they’re earning or potentially how much debt they’re in.

Beyond that basic level, you should begin to get fully transparent with each other about money at the point where you look at that person and think, “I could spend the rest of my life with you.” When you realize that it’s that level of seriousness, you need to have the full conversation. That means sharing all of the information: salaries, credit scores, history of relationships with money, debt loads, investments, absolutely everything. It doesn’t have to happen all in one conversation. It can be an evolving conversation over time.

The other thing I really want you to know about your partner is their triggers when it comes to spending money — what makes them uncomfortable, what makes them want to spend, what their emotional relationship with money is and what they grew up around. Not just what their socioeconomic background was but how was money talked about and treated in their family, because that is eventually going to rear its head in your relationship dynamics.

5. Should you wait to get married when you’re both in debt?

No, not necessarily. My husband had over $50,000 worth of student loans when we got married. You need to understand the type of debt that it is and the laws in the state that you’re getting married.

I’m a big advocate of the prenup myself, so I do think it’s really important to consider going through the prenuptial agreement process. We truly need to reframe how we think of prenups and think of it more like marriage insurance.

A lot of times when I say the word, people get triggered, like: “Oh, you don’t love or you don’t trust your spouse.” No, that’s not true. Everybody getting married has a prenup. It’s the default laws of your state. If you create your own prenuptial agreement, you’re basically creating a slightly different system that you feel would be a fair and equitable division of assets or any debt.

Now all that being said, if you do have debt, depending on state laws and when the debt was created, you’re not necessarily liable for your spouse’s debt. I do think that if you are going to wait, it could be a decade or more before you’re then able to get married if you’re waiting for someone to be debt free.

And the other thing is I don’t think of debt as a red flag for a relationship. What is a red flag is how the debt is being handled today. If there’s credit card debt from five years ago, maybe there was a medical emergency, maybe something happened or maybe they just weren’t good with money at that phase in their life. But now they have a plan and they’re paying it off. If instead there’s a continual cycle of creating debt, that is a red flag.

6. What advice would you give about how to compromise in a romantic relationship before things lead to a bigger money fight?

One of my favorite pieces of advice that an expert told me when I was writing “Broke Millennial Talks Money” was that it’s okay to just let a person take the win sometimes. Say you and your husband want to buy a couch. You want to spend $3,000, and he wants to spend $1,000. Well, $2,000 would be the compromise, meeting in the middle. Instead, it could be that you get to spend the $3,000 on the couch and then at another point, he’s going to get to take the win on a money conversation.

The other thing, too, when you’re getting into a fight about money — especially with purchases that you want to make — is to come back to the original goals that you have set. And if you haven’t set any as a couple, take a minute to do so.

Pro Tip

Develop strong money goals by making them SMART goals.

Your goals are the north star of your entire financial plan. Anytime there is a big debate about how you’re going to spend money, you need to look at how this is going to have a ripple effect on everything else you want to achieve and that can help solve the problem.

7. Do you have any advice for people on navigating cultural norms when talking about money with family?

I do think it’s really critical that we start to have conversations early on about what is the expectation — particularly if you are living in America and you’re married to somebody who has a different cultural expectation of how to handle aging parents or a dependent sibling or a sick relative.

Also, you need to talk to your parents. You need to ask them early on what they want. For some parents, it’s going to be obvious that they expect to live with you in their later years if that’s your cultural norm. You probably have an idea that’s the expectation, but it’s still good to have a chat about it.

For others, your parents might tell you don’t worry about it. Just because they tell you that, doesn’t mean you’re not going to worry about it. I think a really easy way to turn the conversation around is to ask about what they see their retirement looking like. Over time though, it does need to start to become more of a real conversation about the finances.

8. How do you bounce back from a falling out with someone about money?

I think that depends on how necessary — and this is going to sound a little harsh — it is to bounce back from it. What one of the financial therapists in the book said, pertaining to friendship dynamics, is that not everyone is a lifelong friend. I do think that an important thing to consider is that there are friends who will be close friends with you only through seasons of your life. That doesn’t mean that anytime there’s any difficulty or strife, you say, “I’m out!” But it is an important thing to keep in mind.

9. How do you advocate for yourself when you and a friend have different values when it comes to spending money but you want to do things together?

Provide an explanation. It really does help provide context for why you keep saying no or keep pushing back. Now, just because you have different values doesn’t give you the right to belittle their values.

Let’s use an example of going out to brunch. Bottomless brunch is going to cost like 50 bucks and you don’t want to spend that much. You can say, “I really want to spend time with you but I’ll be honest, I don’t want to pay bottomless brunch money right now because I am trying to [insert thing here]. How about we grab a bagel and go for a walk in the park? Or how about you come over and I’ll cook us some brunch?” Provide some sort of alternative solution for the fact that you’re saying no.

Pro Tip

This list of 100 free things to do can help you find an activity to do together that won’t cost any money. 

Now remember, they’re free to do whatever it was they initially planned to do. Just because you’re removing yourself from the equation doesn’t mean that they have to adjust plans. Providing that alternative, however, maybe you can just set up plans for another time.

Another thing you can do is join later. I really love this for birthday dinners and splitting the check. You could join for dessert after or for a drink after. You’ll miss that whole part that’s going to cost the most amount of money. Just tell your friend you’re going to do that ahead of time.

10. Do you think this experience of living through the pandemic will help people become more comfortable talking about money?

I really hope so. I do feel that we certainly have had an unprecedented experience and unlike other recessions prior, most people did not have any level of personal culpability for what happened to them.

You could have had your financial house in totally great shape. You could have had six to nine months — even a year’s worth of emergency savings — but if you worked in an industry that got totally shuttered during the pandemic, that’s not on you.

I do think that, hopefully, people will feel slightly more comfortable having conversations about getting into credit card debt or being behind on bills or their credit score taking a hit because truly it wasn’t their fault in a lot of ways. So that might give us the flexibility to have less judgment wrapped up in some of these financial conversations.

Nicole Dow is a senior writer at The Penny Hoarder.



Source: thepennyhoarder.com