🫣 When is it OK to ignore financial advice?

It’s Chris here to kick off the first newsletter of 2023. I hope you all enjoyed a wonderful holiday and are feeling refreshed. For me, I took a few extra days to recharge and I couldn’t be more excited for what’s in store 2023.

Many of you have probably set new year’s resolutions, some of which may be related to your personal finances. You’ll probably also come across a lot of articles and TikTok influencers giving advice and tips for setting financial goals in the new year.

While those can certainly be helpful, every person’s situation is different. And what applies to one person may not be helpful for another. So, I thought I’d cover what you’re likely to see, and why it may not be the right advice for you.

I do also want to mention that the labor environment continues to get tougher and, unfortunately, the year has begun with many layoffs across tech. If you or your family needs any help navigating their equity or financial situations, please reach out. Simply reply to this email.

📋 Track all your expenses on a budget!

For some, creating a budget can be a great way to prioritize where you're spending your money. For me, personally, and for many of the individuals I help to advise, no two months look the same from a spending perspective.

Therefore, I’d prefer to have more discretion over where I spend my money in a given month and not feel constrained to spend under a predetermined amount.

Consider this instead: Reverse budgeting (save first, spend whatever’s left)

While I’m not personally a fan of strict budget tracking, I am a big fan of simplifying my financial life. I’ve found that one of the best ways to do so is through automating my savings and investment contributions where I can.

By establishing automatic contributions into my 401k and Health Savings Account through my payroll, as well as direct deposits into my brokerage account and online savings account, it provides confidence that I am responsibly setting aside funds for the future and gives me the freedom to spend excess funds in my checking account guilt-free.

💸 Maximize your savings!

As a financial advisor, I’m always an advocate for helping individuals save and invest responsibly for their future. That being said, money is a means to an end. And I want to live a life that feels good now AND one that feels good later.

Generally speaking, increasing your savings and investment contributions is going to provide more optionality in the future (and financial flexibility is a wonderful privilege). Still, increasing your savings rate may not be the right move for everyone.

For example, it could be favorable to pay down / off your student loans, rather than increasing your monthly savings. If you have been a diligent investor throughout your life, maybe now is the time to pair back your savings rate so that you can take that long-awaited trip to New Zealand this year.

My wife and I trimmed our savings rate this past year so that we could spend a month exploring the Pacific Northwest, which included two weddings, a week with our niece, a trip to the Oregon Coast, and multiple hiking adventures. Would our account balances be a few thousand dollars more today had we not taken this excursion? Of course. But that trip was one of the highlights from 2022 and I wouldn’t trade those experiences with my wife for an increased balance on our account statements.

How should you determine a prudent savings target? There’s no magic number or percentage that is right. Rather, I’d suggest reflecting on what is most important to you. What do you hope to accomplish over the next year? If you could craft your ideal life three years from now, what would look different from today? By gaining clarity to these questions, you can identify what you prioritize and make decisions about how much you save and where you spend your money that align with these values.

🧓 Maximize contributions to your 401k!

While a 401k plan has a lot of perks — such as the ability to establish a fixed percentage of your income to be automatically invested each pay period and access to a lineup of low-cost, diversified investment funds — maximizing your 401k contributions isn’t always the optimal decision.

Why? A 401k is a dedicated retirement savings vehicle, meaning these funds are not meant to be accessed prior to your retirement (distributions prior to age 59 ½ are subject to a 10% penalty). As an early/mid-career professional, there are a lot of competing financial priorities and a finite amount of capital to cover them.

So while I would absolutely recommend contributing enough to receive the full employer match, beyond that amount is when it becomes a case-by-case decision based on what is most important to you.

For my situation, my wife and I are actively looking to purchase our first home this Spring, so I have chosen not to maximize my 401k, and instead use these funds to put toward our down-payment savings account.

If you don’t have a near-term cash need, investing excess cash could still be your best option, but doing so in a taxable investment account vs. a 401k would provide you with greater flexibility. Especially if you may need to access them before retirement.

For those of you with vested stock options, it could be wise to allocate funds toward exercising your stock options, rather than maximizing your 401k for the year. You certainly need to evaluate the risks associated with investing in your company stock, however, this decision could position you to retain far greater upside upon an eventual exit event for your company.

📈 Don’t exercise stock options until it’s clear that the company is going to exit!

Investing in a single company, especially a private company that has yet to create a sustainable operating model, certainly comes with increased investment risk.

This is why many financial professionals discourage startup employees from exercising their stock options until an exit event is certain. However, this inaction can be a costly decision.

The decision to exercise stock options should take into consideration both company factors (revenue growth, 409A revaluations, upcoming funding events, etc.), and personal considerations (current liquidity, upcoming cash needs, risk capacity, & career plans).

Early in a company’s lifecycle, the strike price is often very low (likely less than $0.25/share) and the Fair Market Value (or 409A) may also be low, at least relative to your strike price.

This could translate into your total exercise costs being only a few hundred, or not much more than a thousand dollars. Now, it’s important to note that you should still have confidence in your company prior to making this decision, as I would not recommend anyone to aimlessly spend even a few hundred dollars on an investment. But I do encourage startup employees to view exercising stock options as a non-binary decision, meaning you don’t have to exercise all or none.

While no one aims to lose money when making an investment, the risk/return tradeoff of exercising stock options with a low strike price without any significant tax consequence, could warrant the opportunity costs of purchasing shares in your company before an exit event is clearly defined.

Are there any financial resolutions I didn’t cover that you’re interested? Just reply and let us know if there are any on your mind that you’d like us to cover.

Things we’re digging:

• 📊 Thankfully, we did get some positive news on inflation today. Hopefully, things keep trending in the right direction, and my colleague John Morrison covered more about inflation and its impacts in a past newsletter.
• 🚨 Fraud, you say? Even JPMorgan was duped, but it’s a pretty fascinating story.
• 📉 We are likely to continue seeing private markets resetting in reaction to public markets. Many late-stage companies are doing so to be in-line with expectations when the IPO market returns, possibly later this year.