With the release of my new book, Personal Finance for Tech Professionals in Silicon Valley and Beyond, I’ve been repeatedly asked the question: How exactly is financial planning different for someone in the technology industry?
It’s a good question, and if you’re in tech, you need to know the answer. Your financial future could play out differently than most of your friends who work in more conventional industries.
Some of the differences in personal finance for tech professionals are obvious. Equity compensation is one. Tech professionals often receive company stock as part of their compensation in the form of restricted stock units (RSUs), non-qualified stock options (NSOs), incentive stock options (ISOs), or restricted stock. Public tech companies often offer an employee stock purchase plan (ESPP) as well.
These stock-based forms of compensation have detailed rules and important income tax consequences that are more complicated than simple salary and bonus compensation programs in other industries.
Exits are another obvious and related difference. In no other industry do employees outside of top management need to be so keenly aware of the financial status of their company and how that translates to their personal finances, from venture capital financing rounds to initial public offerings to likely acquirers.
Even employees in public tech companies need to follow the organization’s prospects closely. One quarter’s earnings miss can set your financial plan back years if the company’s stock price drops sharply.
A side effect of equity compensation, acquisitions, and IPOs is that income tax planning can become more complicated. More income and career volatility generally require paying closer attention to income tax issues and learning techniques for minimizing income taxes, often over several years. Personal Finance for Tech Professionals presents strategies and techniques for doing just that, along with how to manage your equity compensation.
Other personal finance differences for tech professionals might be less obvious. In the investment area, an investment approach using a low-cost, institutional index mutual fund (or exchange-traded fund [ETF]) is a good default choice for tech professionals, as it is for most people. Tech professionals need to avoid becoming overly concentrated in the tech sector with their investments. They typically have salary, bonus, and company stock all from a tech industry source, and it’s the same company! That can represent significant upside and also significant risk. The situation is even riskier for households where both earners are working in tech.
Also, in my experience, tech professionals tend to weight their investments toward the tech sector—being both emotionally and actually invested. Tech stocks are growth stocks. Ideally, a well-diversified investment portfolio contains a balance of growth and value stocks. For those in tech, it can be beneficial to weight their retirement portfolio away from growth stocks and toward value stocks to mitigate tech sector risk in their overall financial situation.
Balancing saving and spending is another area that’s often harder for tech professionals. If you’re in tech, you know how widely income can vary year to year, with changes in the value of equity compensation and bonuses paid based on company performance. It’s hard to plan for the future when the present is bouncing around. After all, “if the stock does well” isn’t a financial plan.
It’s also hard to know if you’re on track saving for retirement and other goals. While a commonly shared goal in the tech industry is early retirement, tough work schedules and social comparison make it hard to keep spending in check and savings on track.
If you want to retire at age 55, how in the heck are you going to make your money last for another 30 to 40 years in retirement? The answer is you need to accumulate a lot of assets. The book provides recommendations for how and where to save, and for managing spending.
So how exactly is financial planning different for someone in the technology industry? In short, with more volatility and complexity in your finances, you have to think differently, plan differently, and behave differently. If you do, you can set yourself up for a strong financial future.
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