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Dear Quentin,
I am 33 years old, I currently make just over $120,000 a year, including an annual bonus, and my company has gifted me with around $300,000 in equity in the firm, although our stock is brand new, so it is constantly swinging up and down. I put around 6% toward a 401(k) and another 4% toward personal savings, investments and emergency cash.
As far as debt is concerned, I have around $35,000 in student loans, $5,000 in credit-card debt and $16,000 in personal loans. I do not have a car payment. I help partially support my partner of 12 years as his business is, sadly, failing, but he will not let go of the business. So, some of my income goes to helping him cover bills and expenses.
The big question is, should I sell my company equity to pay off my debt? Or, should I continue to pay off my debt and allow my stock to grow? I realize I would have to pay some fairly large taxes due to the gains on the stock, so I need to factor that into the sale as well. Thank you so much for your input, and thank you for your column.
In Debt with Equity
Dear In Debt,
You’ve come a long way in a very short time. The median salary in the U.S. for someone of your age (25 to 34) hovers at around $50,000 a year, so you are punching above your weight professionally and with a 12-year relationship under your belt you are also ahead of the game personally, and clearly living your best life. You don’t have a car payment, which is also a plus. So far, so good.
Before I weigh into your answer, I will offer you the first of two pieces of unsolicited advice, and stress the importance of living within your means. If we could all take that advice to heart! We are all guilty of splurging — sometimes responsibly — from time to time. Your student-loan debt was clearly money well spent, and your personal and credit-card debts make up a smaller proportion of your overall debt.
That said, it’s important to clear your credit-card debt every month and — if possible — avoid paying interest rates on a personal loan. There’s no point in paying off your debts if you rack up a similar amount in the future. That should be the biggest lesson from this rather than using your monthly income vs. your stock options to get back into the black.
“Your student-loan debt was clearly money well spent, and your personal and credit-card debts make up a smaller proportion of your overall debt.”
Before selling stock, it would not be unwise to consult with a tax adviser. For what it’s worth, equity compensation awards for services rendered are generally subject to ordinary income tax at the time they vest or take ownership of the equity, says Timothy P. Speiss, tax partner at the personal wealth advisors practice at Eisner Advisory Group LLC.
“If you vested in the award in 2022, a graduated federal, state combined rate could approximate 40% (or more) before local tax, employment tax, and additional considerations and other facts. You need confirmation and should be monitoring if you have to pay some fairly large taxes due to any potential gains upon the current or future sale of the stock,” he says.
“Your debt level of $56,000 is manageable considering your gross income, and asset values; however, you should review the loans’ interest rates and contemplate paying down these amounts, especially where the interest rate — and the interest costs does not appear to qualify as tax deductible — is in excess of the investment return on your assets,” he says.
“Continue to show yourself the same compassion that you show your partner and his business, but bring the same critical eye to each endeavor. It will help you both in the long run. ”
And now for my second piece of unsolicited advice: Talk to your partner about his plan for the business. You want to balance your support of his dreams with the cold reality of the business’s viability. You may need to enlist an independent, third-party consultant to help you navigate your partner’s approach to his business. You want to help him make the right decision.
Sometimes, it’s hard to let go. But doing so could result in the sale of the business, enlisting a new business partner, a co-investor, or even starting a new venture, Speiss adds. “In considering these suggestions, the preservation of your own income and assets are critical. If the business were to cease, you could still assist him to cover his bills and expenses.”
The good news: Your debts are manageable and don’t require you to sell your company stock, something that you might regret later, and you also have other issues to deal with that are just as pressing, namely your partner’s business and your commitment to avoid racking up even small debts if you don’t have enough money set aside to pay them.
Continue to show yourself the same compassion that you show your partner and his business, but bring the same critical eye to each endeavor. It will help you both in the long run. Sometimes, it’s the stuff that you leave on the cutting-room floor — in this case, what questions you did not ask in your letter — that can provide the clearest perspective, and ultimately prove most enlightening.
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