Next up, we’ve got a question from Joe. He says, “I just took a job with a lower salary but with RSUs included. The total comp is higher. Is it okay to include those in my savings percentage, and how should they factor into the Financial Order of Operations?”
The question is, is it okay to factor them into my savings percentage? Absolutely, if you save them. Because so often what we see, especially with our execs, especially with our folks whose large part of their compensation comes in employer stock, whether it be RSUs or options or something along those lines, is they treat it just like a bonus. Hey, I know in July my RSUs are going to vest, I’m getting a big payday. Well, what you’d want to do is take that big payday and go buy the car or buy the vacation house or go put the pool in or fill in the blank. Because that is income, those are dollars that are going to be included in your taxable income. So, if you’re saving 20 to 25 percent of your normal wages, the normal stuff that hits your paycheck every pay or hit your bank account every pay period, I would advocate that when it comes to those RSUs, you want to save 25 of that gross amount as well. Now, maybe you’re in a place where because a lot of your compensation is in RSUs and only a smaller amount of your compensation is in the normal cadence of your income, then you might actually have to save a lot larger percentage of those RSUs. But you have to think about the entire compensation bucket. When you go to your tax return, look at your total income line. Your 25 ought to be kind of based off of that number. It should be pretty stinking close to what that number is. You don’t want to save 25 percent of a $100,000 salary if in reality you’re making $300,000 because then your savings rate isn’t really 25 percent.
Yeah, you just hit the key point of what I said is that if you’re only playing mind games with yourself or to where you’re basing all of your savings goals off of your base salary and then you have all these short-term, long-term incentives as well as RSUs or stock options, and they’re happening every year, it’s not just a bonus that came out of nowhere, then you need to take that into account. That’s the first thing I wrote is that you need to consider if you’re getting these payments every year in RSUs or incentive options or some other thing that’s part of your total income. So, you need to include that in your savings rate since it’s consistent and it’s coming in every year. What is going to be custom is your automatic savings plan. Because what we’ve seen from a cash flow perspective is that you do need to figure out your goes into extra territory. And the fact that you can base your monthly savings off of your salary because that’s where it’s coming in every month, you can base that amount. But then you’re going to win every year when you get those things vested or you have new incentives paid out to you. That will be custom because you’ll need to set up a plan, whether it’s quarterly, whether it’s annually, on how you handle those big payments that come in. But there’s still part of that 20 to 25 percent of your gross income. It’s just that they don’t flow as easily for somebody who makes a salary, and you can just set it up and set it and forget it type of automatic investment. It’s going to take a little extra work on your part for those big chunks that come in through bonuses.
And then if you are someone who has a lot of the comp that flows through in this way, make sure you understand what the company’s withholding policy is. A lot of time for big RSU payments, they may sell a portion of RSUs to satisfy the tax bill, but it may only be like 20 percent. So, if you have 20 percent withheld on that but because of all of your other sources of income you fall into the 32, 34, 37 tax bracket, you’re going to be in for a rude awakening when it comes time to file your taxes. So, again, understand where those dollars need to go, whether it be to a bucket for additional tax payments, whether they need to go to savings, or whether it can go to consumption. Don’t let yourself be super surprised when next April rolls around. For more information, check out our free resources here.