It’s 2022 and you’ve just accepted a new job offer (yay!). Along with your base salary, you’ve also been offered equity in the new company in the form of Restricted Stock Units or RSUs. You’re excited to start and sort through all the benefits, but you really don’t know the first thing about RSUs. Equity compensation can be a big part of your financial plan, particularly if you are looking to buy a home. That is what we will focus on here.
Equity compensation is an offer of shares of stock, or options to buy shares of stock. It’s often offered as an employee benefit to supplement cash compensation and with the incentive idea of helping grow the company. Specifically, RSUs, turn into shares of a company when they vest. They become available to you according to a vesting schedule. You pay ordinary income tax on them, usually by automatically selling shares and the remaining number of shares is yours to keep. If you sell right away, they can be turned to cash and diversified by purchasing other investments, including a home.
One of the most common questions about RSUs is if you should hold on to the stock or cash them out. I answer that question by revisiting your financial goals: What do you want to accomplish?
For many homebuyers, liquidity is important for a down payment. If you’re searching for a home, you’ve probably heard the stories of all-cash offers, waiving inspection, sales going over asking by tens of thousands of dollars. These are very competitive moves and risky for most. Today’s real estate market is just that – competitive. Having cash and a path to a quick closing is attractive to many sellers.
To help you think about how your RSUs may be helpful in your reaching your real estate goal, ask yourself these questions:
What is the vesting scheduling of your equity? When do the RSUs become available to you?
Many times, you’ll receive equity over a certain period, known as a vesting schedule. We often see a four-year vesting schedule with a one-year cliff, meaning, you receive 25% of shares after one year of service. The remainder will vest monthly or quarterly thereafter. But there are various vesting structures, so be sure to check your stock grant documents.
What is your timeline? Do you want your first home in one, two, or five years?
What is the dollar range of a home you are interested in? What have you determined is an affordable monthly payment? Values of home will move and interest rates will change but we need to start somewhere to plan and adjust. Calculate the down payment based on that value. I like to start with the assumption of a 20% down payment. With today’s real estate prices that might seem out of reach. But a down payment of 20% versus something less like 5%, will avoid primary mortgage insurance (PMI), lower your monthly mortgage payment, and provide a chunk of equity (the part of your home you really own) that you might tap into for future financing.
What is your current savings rate? How much are you currently socking away to your home fund?
When the RSUs vest, they can be cashed out and added to your down payment savings. Understanding your current cash flow outside of RSUs will strengthen your path to affordable home ownership and beyond. I recommend keeping a separate savings account for this goal and scheduling auto transfers per paycheck into the account, no matter how small it is. Every dollar adds up!
A final thought…
Re-evaluate your financial plan and home goal as your situation changes. Income, jobs, expenses, interests, and goals can change frequently, and your plan may need to adjust. I see it everyday and it’s very common for financial resources and objectives to change. Stay on top of the variables of your plan to support all your goals!
Kelly Luethje, CFP®, is Founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain or by a lake working virtually with clients across the country across the country.