“Before I go, let me leave you with a piece of advice my father gave me: Always- no, never- no, always keep a litter bag in your car. It won’t take up much room, and if it gets full, you can always just… throw it out the window.” — Steve Martin, “Let’s Get Small”
With your graduation from college just weeks away, I wanted to take a moment to give you the kind of financial advice only an uncle can give – unsolicited advice.
You’re going to get a lot of advice from so many people in the next few months –the best place to live in San Francisco, what to wear on your first day of work, how to shake hands, when to shake hands, etc, etc….
You’re in a much better situation than I was when I graduated more than 30 years ago – I didn’t have job, I didn’t even have the prospect of a job, I wasn’t sure where I was going to live, and how I would make a living.
On the other hand, you have a job (with an Internet company you began working for last summer), know where you’re going to live and what you are going to do.
But when I think about the advice I was given when I graduated some of it was good, some of it was bad and some was so completely irrelevant, I don’t know why I listened.
My advice is pretty simple.
• Always live below your means
• Save for a rainy day, ‘cause its gonna rain some day
• Always wear your seatbelt and don’t text and drive
What I really want to talk to you about are two things that should be important to any one who is starting out in a new job – especially in a job where you have access to bonuses, stock options and other financial opportunities.
A Bonus is a Bonus – Don’t Try to Live on It
One of my first jobs in marketing after almost seven years in Hollywood was with a four-year old direct marketing agency in Washington, DC. My starting salary was $27,000 a year. Just before Christmas my first year with the agency the president announced that there would be bonuses. I started to think about what I really needed – some new furniture for my apartment, maybe splurge on a new suit. What excitement!
The day came and with great ceremony we were handed our bonus checks. I tore the envelope open – how much could it be? Mine came to a little more than $77 – one day’s pay for every year worked. Was I disappointed? Yes. But I had not been promised anything. Honestly, I don’t know what I did with the money, but given where I was at the time, I am sure I didn’t save it. I wish I had appreciated then that any bonus was better than nothing.
The next year at the agency our bonuses were scratch off lottery tickets. No one won. As you can probably guess, I didn’t stay at the agency much longer after that.
After my move to San Francisco (Silicon Valley) things changed. I was fortunate to have bonuses written into my employment agreements (fairly standard), plus I was awarded stock options and had the chance to participate in Employee Stock Purchase plans. If I – and the company – hit specific targets, a bonus would be paid. I knew what the minimums would be, but the maximums would depend on other numbers. There was always speculation on what percentage the Board might approve and how it would be allocated to different departments.
My first significant bonus check came in 2000 and I wanted to spend it, spend it, spend it. Your aunt and I debated this one – I kept insisting that “I earned this” and that I should be able to spend it. Fortunately, I lost that argument and the entire amount went into our savings account. That really paid off later when the economy turned sour…
Stock Options Can Make You Rich – Or Not.
I joined that Internet startup in 2000 – just as the bubble started expanding and with the market reaching new highs daily. Internet millionaires were being minted every day. At my company, a lot of the employees had come from the founder’s previous start up – a legendary Silicon Valley innovator. They told stories of former colleagues who retired after the company’s stock had split four times in 2 years with share value rocketing up with each split.
As a part of my employment agreement I was issued thousands of pre-IPO shares vesting over four years at a strike price of $00.05. I was able to purchase all my shares pre-vesting, so paid around $10,000 upfront. Because your Aunt always made sure we were contributing to our savings, we were able to purchase all the shares up front. There were folks at the company who would have to wait to vest and would have tax consequences when they did get their shares.
I was fortunate that when filing taxes that year, my shares were valued at .05, as well, thus avoiding AMT. I had one friend, who purchased pre-IPO shares at her company the same way, but when filing, the strike price had gone from .10 to over $1.00 and she was hit with tens of thousands of dollars in an AMT tax bill.
Within a few months I was promoted and my shares were doubled.
Around my first anniversary, things looked good for the company, and we brought on more investors — bringing our venture financing to more than $180 million. The stock split 2:1 and my holdings had doubled again. Another investor came in and bought common shares valued at $10/share. On paper I held almost $1 million in shares.
Almost two years into my time at the company, the marketing department was laid off – myself included. I had vested two years worth of my shares so those were mine to keep. The rest were returned to the company and I got back half of my original investment (about $5000). Within six months the company made a significant financial move, “flushing” the original common shares – 1:3000 – and I had less than 30 shares in the company. 13 years later and they still have not gone public.
Looking back on this experience I realize how lucky we were… we could have been hit with enormous tax bills or larger losses. We were not prepared financially for success or protected from failure.
A Good Story about Stock Options
On the other hand, your aunt joined what turned into one of the largest software companies in the world a year out of college – just one month before they went public. She was given 100 pre-IPO shares. Five years later she gave them a check for $500 and received her stock certificates.
Over the next twenty years she leveraged the employee stock purchase plan and built her holdings in the company. The stock has split and gone up (and down) significantly over the years – and we have sold virtually none of the original shares. Today, those shares represent a large chunk of our investment portfolio.
Until we started using the Personal Capital dashboard and ran the free Investment Check Up tool, we really weren’t focused on the big picture. It was clear that we needed to diversify – and we needed help to do it.
We got lucky. Until recently, we did all of our own investing and made decisions based on hunches and gut feelings. We could have been hit with huge tax bills, and if your aunt had listened to me in 2000 – 2001 we would have sold out of her shares and purchased what are now failed internet companies. Now we leverage tools like the Fee Analyzer and the Cash Flow tracker to see where we need help in maintaining our portfolio.
My Advice to You
My advice to you is this: Bonuses, stock options, found money, or even a bank error in your favor – they all contribute to your portfolio. All money is the same even if you put it into different buckets – be careful with all of it and ask financial experts for help. Save money not just for retirement but for opportunities that might come along – they might be rainy day out of work opportunities or investments you can‘t imagine. Don’t spend money you don’t have (or money you think is promised) because it may not be there or may just be a losing scratch-off lottery ticket.
Your aunt and I wish you the best of luck as you start your career. And make sure you have an extra room so we can come and visit soon.