Dear Dollar Stretcher,
About three years ago, my husband left his job (a buy-out package) to return to school. In that time, he never had a job; he just concentrated on raising our two girls and getting through with his classes. He is now happily employed, but we ran up a few bills while he was "unemployed."
Now that we are a two-income family again, we are trying to play "catch-up" with our bills, but don't seem to be going fast enough. We pay extra each month on most bills, (mortgage, car loan, etc.) and we have eliminated our credit card bills, with the exception of one.
Every year my company gives stock as a bonus. I have never cashed my shares in, mainly because I don't know too much about the stock market. But now, I'm thinking of cashing them in to help pay off the bills. What's your opinion on cashing in stocks to pay off a few bills? I'm very impatient and am sick of being in debt! Thanks for your advice.
Offering employees stock or stock options is gaining in popularity. A practice mostly limited to high-tech companies is now becoming more commonplace in many industries. The reasons are simple. It's a great way for companies to reward employees without spending significant amounts of cash.
According to the National Center for Employee Ownership, nearly 9 million U.S. employees participate in Employee Stock Ownership Plans (ESOP), and control $210 billion in company stock. An additional $250 billion in company stock is in 401k plans. And at least 200 larger companies give stock options to most full-time employees.
When you break it down, Shelly's basic question is a simple one. Will the money that she receives as a bonus earn more for her in the company stock or as a repayment of debt? An exact answer isn't possible unless you can predict the future price of the company stock. But we can share some ideas to give Shelly a firmer foundation for her decision.
One way to decide is to compare the expected earnings on the bonus money in the next year or two. Although it's very hard to predict stock prices, it is much easier to figure what her debts will cost. For instance, any money that she applied to her mortgage would earn the interest rate of the mortgage. So if her mortgage was at 7.75% any money that she used to prepay the mortgage would earn that much. One warning. Be sure that the prepayment is applied to reducing your principal and that there's no prepayment penalty.
Or suppose she wanted to pay off the note on her car. The same procedure applies. If the interest rate on the car loan was 8.3% then that's what she'd earn with any money applied to the loan.
Guessing what she's likely to earn on the stock in the next few years is much more difficult and probably ends up being little more than a guess. Shelly could look at Value Line in her library or any of the online investment websites. Most will have information showing what the stock has done in the last few years. But using the past to predict the future is always chancy. If predicting stock prices were that easy, anyone could do it.
But Shelly does have one advantage in predicting the future stock price. She knows about the company because she works there. If business is good and everyone seems to be working overtime, you would expect that to translate into good earnings and an increase in the stock price. On the other hand, if orders are slow and management seems to be struggling to stay profitable, that could be a warning sign of lower stock prices.
One other factor complicates the comparison. Suppose that Shelly expected the stock to increase in value by 10% and the interest on her credit card balance was 14%. She'd get a 4% better return by selling the stock and paying off the card. Right? Well, not quite. There will be some costs to convert the stock shares to cash that she can send to the credit card company.
Shelly will need to find out how much money she'd have if she sold the stock. Obviously she'll start with the value of the stock. But she'll need to subtract any commissions she pays to sell the stock and any taxes that are triggered by the sale of the stock.
Next she'll need to estimate taxes. A lot will depend on how the company set up the plan. ESOP and 401k plans are meant to be tax-deferred vehicles. The goal is long-term stock ownership and a selling stock could be expensive taxwise.
If, however, the shares are a bonus, then Shelly will be in a better position to sell them without triggering big taxes. To be sure she should contact her human resources department and ask about the taxes due on sale. Her employer will be in the best position to know how the plan was set up.
One final caution for Shelly. Be careful of getting too dependent upon your employer. While there's nothing wrong with owning stock in the company you work for, owning too much could set you up for a fall. If the company should encounter troubles, not only could you lose your job, but you might also find that your stock has also lost much of its value at the exact time that you need it to help you cover expenses.
Ultimately, the decision will probably boil down to how Shelly feels about her company's prospects and how much she dislikes debt. Comparing returns can help provide a framework for her, but there is no mathematical "right" answer. We hope that Shelly's bonus is a big one and helps her move towards financial freedom.
Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report and he's a regular contributor to US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+.
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