Every April, the NCAA men’s basketball tournament comes to an end. The winning team receives the trophy as the song “One Shining Moment” plays.
…And all the years
No one knows
Just how hard you worked
But now it shows…
One shining moment, it’s all on the line
One shining moment, there frozen in time
At KB Financial Advisors, we work with tech employees in San Francisco. But, we still see the role of one shining moment in the lives of our clients.
How to recognize your one moment
Growing up, I played Monopoly the board game with my little sister. Imagine trying to play Monopoly with your older brother, who grows up to be a financial planner. It was brutal.
There comes a point in every game of Monopoly where the odds shift in your favor. Recognizing that moment is the key to your success.
Your one shining moment is the point in your financial plan where things speed up. You go from slow, steady progress to creating ten years of wealth in one years time.
Experience prepares the way for your one moment
Experience is the building block of opportunity. You should take risks within the scope of your experience.
The tech employees we work with all have specialized skills. Their work experience will lead to millions of dollars in career earnings.
Yet some want to learn more about how to choose individual stocks. Their experience is in tech not investing.
Focus your risk taking on areas where you have experience. Doing so gives you a greater chance of tilting the odds in your favor.
Finding one stock that outperforms the stock market will be completely random. Using your experience to start a new business or choose a promising start up to work at will be a lot less random.
Experience is not free. It takes trial and error. Find an area where your interests and skill set allow you to collect useful experience. Develop a unique base of knowledge with which to take risk.
Experience develops your ability to recognize opportunity and gives you the confidence to act.
Be Ready for Your Moment, Recognize Opportunity
Experience is the first step. Opportunity is the moment when the odds shift in your favor. Develop recognition for your opportunity and be ready to act when the moment arrives.
There are four ways we see our clients capturing opportunity:
1. Back to School
From experience, you know that going back to school will allow you to move further in your career.
There are no hard and fast rules for determining if going back to school is right for you. Like every opportunity recognition of its potential takes intuition based on experience.
We usually look for a 25% increase in income for each year of extra education. The total cost should be no greater than one year of income after the education is complete.
You spent time working at a big tech company. You have experience that is in demand with start-ups. Your financial plan is solid; you have the ability to take risks. Making the move to a start-up can open up new opportunities.
Check on potential equity and your ability to exercise the stock options you receive. The best opportunity is to be one of the first fifty employees and receive Incentive Stock Options, with early exercise.
3. Starting Your Own Business
The risks are greater but so are the opportunities. Develop your own idea to unlock the greatest potential opportunity.
Starting your own business does not have to represent a giant leap into the unknown. Give the idea time to develop and opportunity a chance to shine through.
Start small. Make the new business an extension of your past experience. Develop your idea during time outside your day job. Once you have tested the market, devote all your time and resources to the business.
4. Changing Jobs
Changing jobs is an accelerated version of building wealth by saving a part of every paycheck. The paychecks get bigger faster as you change jobs. Your ability to save money gets fast-tracked too.
Instead of one moment, this opportunity shows itself as income that grows by more than 10% a year. Early in your career this type of income growth can be easy to get. You may need to change companies or roles within a company every few years to maintain the rate of increase.
Be sure to capture the accelerated increase of your income as savings. Spend only 50% of every raise so that the extra income is invested instead of spent.
Your opportunity may be like one of the four listed, but the specifics of your moment will be unique to you. Experience gives you the ability to recognize opportunity. The ability to take risk is the final step.
Risk Capacity, The Ability to Take Risk
Risk capacity is the ability to take risks in pursuit of opportunity. Risk capacity is the third key to seizing your one shining moment.
Risk capacity more than experience and opportunity is defined by numbers. It is having the financial resources to risk loss of your money in pursuit of greater gains.
Risk capacity increases with a high net worth, low living expenses, high savings rate, and cash on hand. Debt, higher living expenses, and reduced savings all hamper your ability to take risk.
Take working at a start-up for example. You give up the higher salary at a large tech company in exchange for more equity and a greater opportunity. Debt and high living expenses prevent you from making this trade regardless of the opportunity.
Also, taxes will affect the value of your stock options and equity. The potential gain is greatest when receiving incentive stock options with early exercise. Doing so requires cash. Not having the cash on hand to early exercise could cost you millions in lost gains and increased taxes.
Make sure your financial plan is solid so that you can take risks. Develop good saving habits early, avoid debt, and build up cash reserves.
Six Steps to Capture Your Moment
1. Focus on Your Career
Your career is your number one asset. It’s where human capital (experience) gets converted into financial capital. Wealth building starts here. Find ways to combine your interests and unique abilities into a profitable career.
2. Wade In
Every summer I went camping with my grandparents. The park where we camped was full of rivers that I loved swimming in. The only problem was how cold the water was.
There were two ways to conquer the cold: wade-in or jump. As a kid, I opted to jump. As an adult taking risks, I opt for wading in.
Find ways to take incremental risks. Stretch yourself into new areas. Build experiences piece-by-piece. Develop your ability to gauge opportunities. Recognize your moment.
3. Conquer Fear and Regret
There is no such thing as a risk-free opportunity. Do not let fear stand in your way.
Regret can also paralyze you. Don’t dwell on the opportunities you missed in the past. Learn your lessons and move on.
Let go of fear and regret. Build the confidence you need through experience. I often tell Melissa, my wife, when we discuss our goals, “I’m not talking about going to mars.” There are others who have done what you are trying to do. Why not you?
Cash is the fuel that your opportunity engine runs on.
Keep ten percent of your annual income as cash in the bank. Keep twenty percent as an emergency reserve.
Your cash needs may be a product of your stock options. Know how much it costs to exercise and keep the cash ready.
5. Avoid Debt
Debt has the opposite impact of cash. It keeps you from having the ability to act on opportunity. Debt kills risk capacity.
Avoid debt especially bad debt. Bad debt is debt used for nonproductive purposes. Credit cards are the primary concern here.
6. Consistent Savings
One shining moment is an important part of your financial plan. But, your success should not depend on the realization of one large event.
Save money. Save while you are waiting on opportunity. Continue to save after your realize your one moment.
Max out your 401(k). Capture 50% of every raise as savings. Compound interest is a powerful force; saving money keeps it working for you.
One Shining Moment in Action
At KB Financial Advisors, we work with clients whose financial plans move fast and slow. We help people max out their retirement plan and save little by little over time.
But, our clients also experience big jumps in wealth. It is the big jumps that make the difference.
Let’s say you are working in tech earning $200,000 per year. Every year you max out your 401(k) at $18,000. Your employer offers a great match and kicks in $9,000. Your total 401(k) contributions add up to $135,000 over five years.
You will save $675,000 over the next twenty-five years. Invest well and with earnings that $675,000 will grow to more than $2 million.
Not bad at all.
What if you decide to go to work for a start-up? You become employee number 23. Your salary drops to $155,000, and you receive 30,000 shares with a strike price of $0.05.
The start-up doesn’t offer a 401(k), and your salary has dropped. You reduce your savings to $9,000 a year, but you had some cash saved up outside your 401(k). Your stock options offer early exercise, and you use your cash to buy the shares.
Five years later the company goes public. After the six month lock out, the stock trades for $42 a share. Your shares are worth $1,260,000.
The $1,260,000 invested over the next twenty years could grow to $5,936,238. This does not account for the $9,000 you saved over the last five years or saving more after the IPO.
Slow and steady can win the race. But, it is better to be a little more hare and a little less tortoise at least once.
Helping clients prepare for one shining moment is what we do. You can get started now by scheduling your call today.