For many of us, spring is a time of renewal and fresh starts. It is also frequently a time for bonuses. If you’ve had a successful year, you’ve hit your metrics and bonuses are part of your compensation plan, here are some key issues for you to think about before your bonus is deposited into your bank or brokerage account.
1. A Bonus Is Not Free Money
I know, this feels like free money. It’s not. You’ve earned it. It’s a little different in that it shows up in your account in a different way, at a different time and in a different amount.
2. Have a Plan
The best way to move forward is to have a plan for the funds before you receive them. This plan can include a variety of things, like a special treat for yourself, such as a vacation. Some other items to consider: Making a contribution to your emergency savings fund, paying off debt, making an additional contribution to your retirement account, saving for your child’s college, or making an extra payment on the house. (For related reading, see: What Should You Do With Your Christmas Bonus?)
3. Cash vs Stock Options
Sometimes you get to choose—cash or stock options. Hmm. What should you do? It depends on your individual situation. First, realize that when you receive stock options, you are not receiving stock. You are receiving an option to purchase the stock at a specific value. You’ll have to “exercise the option” to receive the stock. To receive cash, you’ll need to sell the stock. As you can see, choosing to receive your bonus in stock options indicates that you are betting positively on your company—which is probably one reason you chose to work for this employer.
Specifically, you’re betting that the stock price will increase. You’re also indicating that you may not need the cash—you’re willing to wait for the stock price to increase, while the option vests, usually from one to five years. However, if your circumstances are that you need cash in the short term, stock options may not be the right way to go. Perhaps you want money for the down payment on a home, or you’re paying tuition for your child or your emergency fund needs replenishing. If this is your scenario, choose cash over stock options. (For related reading, see: Get the Most out of Employee Stock Options.)
4. Restricted Stock Units vs Stock Options
Many companies are moving away from stock options to restricted stock units (RSUs). Therefore, to make the right choice, you should know a few differences between stock options and RSUs. First, as mentioned above, a stock option is a right to purchase the stock at a specific price. If the stock value never reaches the option price, the option is worthless. However, RSUs become stock and are valued on the day they vest. Additionally, stock options and RSUs are taxed differently. Stock options are taxed as income when you exercise the option. You are in control. RSUs have a vesting schedule. They are taxed when they vest and become stock. You can then choose to sell or keep the stock. These are a couple of items you should think about when choosing between RSUs and stock options.
5. Check With Your Financial Advisor
Making these choices and using your bonus to support your financial goals can be overwhelming. Don’t hesitate to speak to your CERTIFIED FINANCIAL PLANNER™. A financial planner will be able to help you incorporate your bonus into your comprehensive financial plan.
(For more from this author, see: 5 Steps to Build Wealth and Grow It Over Time.)