You’ve finally pulled the trigger, selling a chunk of your company stock and leaving you with a pile of cash sitting in your brokerage account. What now?
Well, if you’re like most people, you’ve already put some thought into this. You probably wouldn’t have sold if you didn’t need the cash, but perhaps you sold more than you needed. Or perhaps you wanted to “diversify,” so you sold more stock to reduce the risk that comes with having both your wealth and income tied to a single company.
Now you have a pile of cash, and need to know what to do with it. Let’s talk about that.
Make Your Cash Work for You in a Cash Structure
You could blow your cash. No, really, I’ve seen it happen! This is especially likely if the cash doesn’t already have a “home” or a place it belongs. It can simply disappear over time and leave you wondering “what happened?”
You could also hide it. I’ve seen that too. Far too many people buy gold or put their cash in a safe thinking that is a “conservative” thing to do. Not so. The effects of inflation (even as low as it is today) combined with the off-chance you could lose it or have it stolen makes this “strategy” a no-go.
What you should do is have your cash work for you.
Now, I don’t mean that all your extra cash should be invested—we need cash available to pay our bills and cover emergencies. And if you’re like my clients, you have a widely variable income due to your stock awards or commissions received.
In that case, it’s very important that you create a Cash Structure, which is designed to give every dollar a job. The simpler the Cash Structure, the better.
Your Cash Structure Starts with a Target Savings Amount
First, we need a Target Savings amount. By “target,” I mean that we won’t have this exact amount all the time, but without a target, we won’t know the amount we’re trying to maintain in savings. Simply put, the Target Savings amount is your Emergency Fund plus any Net Cash Needs over the next five years.
Your Emergency Fund is pretty straight-forward. Imagine you lost your job today, and imagine the world in which that would happen. It’s likely the stock market is down, the economy is down, and it will be much harder to find your next job than it is today.
In that environment, how long would it realistically take you to find your next job? Whether 6 months, 9 months, a year or more, that’s the amount of savings you need in your Emergency fund: Your living expenses multiplied by the number of months you think it would take you to find employment.
Your Net Cash Needs are however much cash you plan to spend, over and above your income, over the next five years. For example, if you plan to buy a house, car, or a vacation home, you’ll be spending cash over and above your income.
Again, your Emergency Fund and Net Cash Needs are added together to make your Target Savings.
Invest the Cash that Exceeds Your Target Savings Amount
Yep. Invest the rest of your money in your Long-Term Portfolio. It’s really that simple.
Now, this assumes that you have a Long-Term Portfolio already in place. If not, you should!
This portfolio should have three attributes:
- First, it should have no more risk than you can handle in a market crash (and you will experience several more in your lifetime). This is because we can never predict crashes, and the only way to earn large returns through the stock market is to ride through the crashes.
- Second, the portfolio should be expected to return enough to help you meet your life’s goals. That’s what planning is, after all! Of course, there’s no way to predict what markets will return. Past performance is certainly not to be taken as a prediction, but it’s basically the only guidance we have. So, to consider how well our portfolio may do in the future, we first should understand how it would have performed in the past.
- Third, the portfolio needs to make sense in all types of markets and economic situations. The moment we begin to guess what should work “now” vs. what has always worked over time is the moment we start losing the investment game.
Why Cash Structures Work So Well
When you don’t have to think about where your extra cash goes, what account it should be in, or whether it should be invested, you are much more likely to move forward with the plan.
This system gives you freedom to not think about these decisions every time you sell your company stock. Instead, it provides a path that makes sure you have money in the right places at every point in time. By the second or third time you follow through with the plan, it will start to become a habit.
What Gets in the Way of Following Through with Cash Structures
We can come up with all kinds of excuses when money is involved.
One excuse is that it’s fun to see a high balance in our bank account. However, when money isn’t working for us, it’s working against us. There is no middle ground.
Consider inflation. At even a 2 percent inflation rate, the monthly cost of everything you buy will double in 35 years. That means your cost of living in retirement may be twice as much as it is today. You have to invest to beat inflation.
Another excuse is concern that “today” might not be the best time to invest. Well, it probably isn’t, but that’s ok. We’ll never be able to guess the exact best time to invest, but we know the stock market goes up about 3 years out of every 4. And if we’re talking about long-term money, it will be ok even if the market drops right after we invest!
But the worst, and the most destructive, excuse is wanting to increase your spending because you have more money. This indicates that you have no long-term plan, or are more than willing to throw away your long-term plan.
Don’t get me wrong. It’s perfectly natural to feel this way, but acting on it can cause major money problems.
Here’s the Good News About Following Through
With good systems come good habits.
A solid Cash Structure will keep you on-target for your life’s goals while making sure you have enough money to do what you want today, and making sure your long-term money is working for you and all you want to do in the future.