Employee Stock Options: Do I Invest With A 10% Discount

In other words, this would mean that you have an attractive piece of cake placed right I front of you. It is laden with all the sweetness, you ever wanted have. However, the catch is, one piece of that and you can forget the rest of the dinner because your hunger can only take in that much.

The same analogy goes in for investments. You start investing in stocks and end up putting too many eggs in one basket, the risk automatically rises. Going by the current trend among organizations is to provide a discount to employees who buy their stocks. Now understandably this is done to make things more attractive for the buyer. However, there is a certain thing one needs to keep in mind before indulging in that cake. Even before that let me tell how this thing actually works.

A set amount is of your monthly income is debited off and put into an escrow account. Twice a year, and this may vary from company to company, the money set aside in that escrow account, will be used to buy stocks, either at their lowest prices at buy in or during close, whichever is deemed cheaper. Add to it the employee discount that can vary from 10% to 15%.

Now, you can go ahead and immediately sell it if you want to and earn a 15% bonus, but again these numbers do keep changing.

Now, the thing which you need to keep in mind regarding stock options and the way to hold it. The first one, which we discussed, is for immediate selling and is called an ESOP (Employee Stock Options) and the other one is called RSP (Restricted Stock Purchase). Now what happens in the latter is akin to what one will do to the usual stock and shares i.e. hold on to it for a period in time. Now, chances are that the value of your stock may fall below your discounted price and that you may be facing a loss. If you are willing to sell it within a year, then you do act a short term investor, which may always be a bright idea, especially with company stocks. You may want to hold on to it for a longer period, which again has its risks, but has benefits too. The idea is to keep on checking the prices and the profits you would make.

As for starting a dinner with a cake and missing out on the rest of the food, investment to needs to be diversified. Having a little of most is a much better idea than stuffing oneself with only very few.

Over The Cliff With A 401(K)

To begin discussing this subject let us be aware of all the facts we know about a 401(k).

What is a 401(k)?

A 401(k) is nothing but a retirement savings plan sponsored or paid by the employer. The employer lets the employee save and invest a certain percentage of their pay before it is taxed. Point to remember in a 401(k) is that you will only be taxed when the money is withdrawn and not when it is deposited.

So would it be worthwhile to contribute to 401(k) with a 3-year cliff?

Your question to me could be what exactly is a cliff? Is it the edge of a mountain or the end to nowhere? A cliff is nothing but vesting. A cliff vesting is when an employee becomes completely vested in a specified period in time. So for example, you have fully vested in a company sponsored pension plan only after 5 years of full service.

Now, coming back quickly to the intended subject, the money that you invest in a 401(k) is all yours. So for example, you work for 5 years and leave your job, there will not be any effect on the investment that you had made in a 401(k). The only thing that changes is the contribution of the employer because that depends on the vesting period. It is a good plan with good benefits. However, it is not something that is quickly recommended to young professionals.

To begin with, a 401(k) is ideally to be kept as a secondary hold. The idea is to maximize other resources and then fall back on this vehicle. My advice would be to begin investing in the Roth IRA and contribute to it till you do not reach the maximum limit. Once you have touched the limit, look towards the 401(k). This has a great advantage, the first and foremost being diversification.

There is a different school of thought who might suggest that given the pretax nature of 401(k), you will have more money to start with and then go ahead with your contributions to the Roth IRA.

Remember, most successful finances are largely behavioral. So a 401(k) being an automated process, really makes you keep aside a certain amount of investment, which otherwise would have been spent elsewhere. It actually is dependent on how you see yourself in 10 years time.

Would Refinancing My House Improve My Credit Score

Refinancing has often been used by many to avail lower rate of interest and pay off their housing loans without spending a fortune. However, what leaves most people confused is the impact of refinancing of house loans on their credit score. There’s no point in trying to understand credit score vis-à-vis the refinancing as that involves many complex metrics and calculations. Broadly saying, credit score does get affected but it definitely is impacted by every refinance or loan modification.

Your FICO score is bound to be affected by any loan modifications or refinancing moves you make. However, the quantum of impact depends on how the refinancing gets reported to the credit bureaus. Your refinancing can be reported as the same loan with just a few modifications or it can be reported as a completely new loan.

If the refinancing is reported as the same loan with just a few modifications then changes in loan balance, credit enquiry and any changes in loan terms will have an impact on your credit score. Even if this happens, changes to the FICO score will not be anything substantial.

On the other hand, if the loan is reported as a completely new loan then your credit score still gets affected by then changes in loan balance, credit inquiry and any changes in loan terms. However, another new piece of information affects the FICO score and that’s new “open date”, which indicates that the credit obligation is new. This will have a greater impact on your credit score than what would have been in the case of simple changes in terms of an existing or old loan.

Refinancing your mortgage will certainly have an impact on your FICO credit score but it’s not going to improve it in any way. The impact will be small as well as short-lived. Refinancing might have a greater impact on your credit score if it’s done too frequently or putting in new credits associated to your mortgage. FICO often penalizes if you are not able to honor the terms of the credit or receiving too many inquiries pertaining to your credit report.

Irrespective of what your refinancing terms or needs, your credit score will definitely take a beating, even if it’s for a short term. Thus, you should research a bit before taking the refinancing path and it’s always advisable to weigh your options before you refinance your housing loan.

Is It Practical to Use Zero Based Budgeting

Business owners and top-level managers invest a lot of time budgeting and in bigger organizations, the process itself incurs huge costing. In traditional methods of budgeting, the managers are required to review the previous year’s budget and then make amendments based on the performance expectations. However, in Zero Based Budgeting (ZBB), a completely reverse approach to planning and budgeting is applied.

Zero Based Budgeting doesn’t take into account the previous year’s budget and is instead begins at Zero. The managers need to justify all the budgetary expenses and not limit themselves to the previous year’s budget. Everything starts at zero and the planning and decision making is done on the basis of budgeting. One of the prerequisites of this budgeting is that the mangers need to be ready for detailed documentation and budgeting. The managers also have to identify and even justify the expected expenditures and arrange the activities in accordance to their relevance and costs.

Zero Based Budgeting paves the way for the high level management to make decisions as well as budgetary curtailments based on the documents during any time of the financial year. There is no provision of pre-financing as is in the case of traditional budgeting. This is a big reason why this type of budgeting is followed in the non-profit sectors and government. However, Zero Based Budgeting has to undergo frequent reviews, usually every year, as it is a costly and time-consuming process.

People favoring the Zero Based Budgeting usually point to the following advantages:

  • Resources are allocated vis-à-vis requirements and benefits, which is extremely efficient
  • Managers are compelled to find cost-effective methods for improving activities
  • Inflated budgets can be easily detected
  • Service departments find this to be extremely efficient because often it’s difficult to identify criteria

 

Naysayers point to these disadvantages of Zero Based Budgeting:

  • It’s time consuming because defining expenditures is often challenging for the managers
  • Zero Based Budgeting needs too many support staff and managers to prepare
  • Managers have to be given prior training on this method of budgeting before they can actually begin the process, which again is time-consuming
  • Everyone has to be aware of the details as huge volume of data as well as forms are needed for effective Zero Based Budgeting

 

Zero Based Budgeting is considered to be an honest approach to budgeting but when it is not too practical for private organizations and larger businesses to follow. They are bound to face capital and manpower shortage while trying to implement Zero Based Budgeting.

Graphic: Reveals How Startups Make Billions


The is a new infographic by Anna Vital. It describes a way in which a startup business may become successful, but does so in simplistic terms. Because this is an infographic, points are listed, but they are formatted to a curving line, rather than in list form.

The first step, according to the image, is to find and study an already successful or existing product. The point of the study is to find out how it could be made better. The next point on the infographic is not spelled out, but it advises persons to make the improved version and market it to likely buyers or project funders.

The next steps are to remake the product again, find partners or/and investors and then to sell the product. Eventually, the image assumes that your product will be successful and sell,therefore making your next steps as follows:

Listing your company on Nasdaq, selling shares, and making back the money that the investors and partners put in.”