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Stock Option Mayhem! | Series 2.8
Episode 83rd May 2021 • Enjoy More 30s: Family Finance • Joseph P. Okaly
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Make sense of all those restricted stock (RSU), stock options, and stock purchase plans (ESPP) into a plan that can most benefit you.

  • Restricted stock units (02:58): become immediately taxable in the year they vest (04:32)
  • Stock options: don't incur taxation when they vest (06:33)
  • Stock purchase plans: buying into your company's stock at a discount (09:12)

Quote for the episode: "What you can do is really make sure you're paying attention to this balance of being tax efficient versus being overly concentrated, and therefore kind of exposed to how one company may be doing or perceived to do."

Securities offered through TFS Securities, Inc., Advisory Services through TFS Advisory Services, a SEC Registered Investment Advisor Member FINRA / SIPC.  TFS Securities, Inc. located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcripts

Voiceover Audio:

Welcome to the Enjoy More 30s: Family Finance

Voiceover Audio:

podcast, the only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

that tend to weigh on us, stress us out and distract our focus

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

Welcome once again to the Enjoy More 30s: Family

Joseph Okaly:

Finance podcast. This is the last episode of this series

Joseph Okaly:

before the recap, and this would be the "Your Money Multiplier"

Joseph Okaly:

series. And today's episode is entitled "Stock Option Mayhem!".

Joseph Okaly:

So today, what we're going to cover is what you need to know

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when it comes to making sense of all these different restricted

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stock, stock options, stock purchase plans, and what you can

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do to build them into more of a comprehensive plan or approach,

Joseph Okaly:

that can therefore most benefit you. These are definitely things

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that, you know, stress people out or make people uneasy on how

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they should be approaching it or what the tax ramifications might

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be. And so this is a great, great episode for people that do

Joseph Okaly:

deal with these kind of stock options and associated pieces.

Joseph Okaly:

So my daughter Avery was my first child, she was born back

Joseph Okaly:

in 2016. And I can still remember leaving the hospital,

Joseph Okaly:

they walk you to the door, my wife Lauren's in the wheelchair,

Joseph Okaly:

we're holding this little baby that we're parenting for two

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days. And we know that she's super important. She's really,

Joseph Okaly:

really valuable. And they get you to the door, the sliding

Joseph Okaly:

doors open, the fresh air hits you in the face. And then

Joseph Okaly:

they're like, "Okay, well get out of the wheelchair now. There

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you go, on your way, good luck." And you know, hopefully you know

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enough from that 15 minute class we gave you to keep your

Joseph Okaly:

daughter alive. And you get into the car and you drive home and

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you look in the rearview mirror about 1,000 times and make sure

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she's doing okay back there, and her car seat which is barely,

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barely small enough to fit her.

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And this kind of mentality of being given something that's

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very important, but not quite sure of what we need to be doing

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with it exactly. That relates a lot to how you may be feeling

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when it comes to these, you know, stock options and things

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of that nature, it'd be very much along the same lines. Hey,

Joseph Okaly:

here are these you know, special gifts we're giving to you. They

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sound pretty fancy and important. Here's a 20 page

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document of legalese on how they work, or at least how to cover

Joseph Okaly:

us if you don't use them properly. And you're welcome and

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good luck. Now, the great thing when it comes to stock options,

Joseph Okaly:

as opposed to my daughter, is you can't kill them really. You

Joseph Okaly:

know, this is extra income that's coming to you, or an

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extra potential benefit that's coming to you. So we just want

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to make the best use of this gift that was given to us. And

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so that's what this episode today, we're going to run

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through to try to help.

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We're going to start with what most people get nowadays, which

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are called restricted stock units, or sometimes a lot of

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times are abbreviated as RSUs. They're a little bit more

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straightforward than some of the other things that you may

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already have or may be given. And they attach to kind of a

Joseph Okaly:

brokerage account. So if you have these and you've been given

Joseph Okaly:

maybe a confusing statement on it, you'll see two sections.

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You'll see the first kind of page section that'll have your

Joseph Okaly:

name on it. And a lot of times it'll say TOD, transfer on

Joseph Okaly:

death, kind of account they seem to set up for a lot of people.

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But it's an account that's in your name that has little to

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nothing in it to start. The second, or subsequent pages,

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you'll start to see these restricted stocks broken down.

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And it'll show you what date it was given to you, and then

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they'll talk about when it's vesting. Generally, vesting

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occurs in three years. What vesting means is just now it

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becomes yours. So let's say you got given 100 shares, and it

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vests in three years. Right now there's no value to it, because

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it's not yours yet. They gave you basically a promise to

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transfer this to you in three years, if that's the day that it

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vests. Three years go by, these 100 shares vest, and then what

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happens for most people is all of a sudden now on that first

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page that we started with, where it just has your name on it- a

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general account, all of a sudden you see this 100 shares show up

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in your first account. This is great. Now you see this money is

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here and now you can actually kind of touch it.

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The big thing first off to know when it comes to restricted

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stock is when this vesting occurs, it is now 100% taxable

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in that year. You can't control it, you can't adjust it. If

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those 100 shares the value at that three year part or three

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year day was $10 a share, so 100 times 10, $1,000 is being added

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to your income. That's it, can't change that at all. As the stock

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now changes in value from that point, now that will affect any

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subsequent gains you might have to pay on it, but the bulk of

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what you're going to owe from a tax standpoint is going to be

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ordinary income, just like your wages, in that year that it

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vests. Some people, what they have, we've seen is these

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restricted stocks, they don't even transfer the shares, they

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just immediately sell out of them and send you a check. So

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that might be how yours works as well. The most important part of

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this first part of what we've covered is, if you have

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restricted stock, whenever it vests, it's going to become

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immediately taxable in that year.

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The next part of this, if it does transfer as individual

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stock, this is something that we always caution people about. A

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lot of people have, you know, if you work for your company, if

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you've been there long enough, where you're starting to get

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some of these additional benefits that are being given to

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you, you may have a strong affinity for your company.

Joseph Okaly:

However, being cautious about keeping money in any individual

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stock, your company or otherwise, is something that we

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always caution against because you're putting a lot of your

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eggs in one basket. How your company does or is perceived to

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do now is extremely influential on how much value this has. So

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RSUs are much easier to get out of your company stock right

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away, because again, it's already been taxed. So since

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it's already been taxed, you can take that money out, you could

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put it into a general account, and you can diversify it out

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much more than just one individual company stock is.

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Stock options are way more confusing. So graduating from

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restricted stock to stock options. Less people have these

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now, because the tax rules for what companies were able to do

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changed, so the stock option is less beneficial to the issuing

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company, so that's why you don't see them as much anymore. But

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what makes them more confusing is they don't incur taxation,

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when they vest. So let's say three years is when they vest.

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That's not when the taxation occurs, it occurs when you

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actually exercise the option itself. So instead of having

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this automatic value, there's a price that they're giving it to

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you, and then an end date that you can exercise it. Kind of as

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an example, let's again say you were given 100 shares. Instead

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of just being given 100 shares like for how the restricted

Joseph Okaly:

stock works, they're giving you 100 shares and they're saying

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'we're going to give it to you at a price of let's say $5 a

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share.' Okay, so $5 a share, now goes three years later, now the

Joseph Okaly:

$5 a share went up to $10 a share. So now if you do exercise

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your option, what you're getting is the difference. So they gave

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it to you at five, it's now worth 10, the difference is

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five, so five times 100- now you have $500 of income that's

Joseph Okaly:

realized. But it's not automatic, you have to exercise

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it. On the flip side, let's say they gave it to you at five, and

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after three years it vests and now it's worth $3 per share.

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Your options are worth nothing, because they gave it to you at a

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price of five, right now it's at three when you were able to sell

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it. And so there is no value. You can wait and see if the

Joseph Okaly:

stock price goes up, but there is an end date for stock

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options, so you can't just hold on to it forever.

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Stock options, in my opinion, have the same issue that we

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covered with the restricted stock in that you are having a

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potential large holding in one company. So how that company is

Joseph Okaly:

perceived to do, or how they actually do, influences how the

Joseph Okaly:

stock does and therefore the value of it. So again, we tend

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to like to get out of the stock options more quickly after

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vesting. Sometimes depending on taxation, things of that nature,

Joseph Okaly:

we may want to wait slightly. But the goal still is to not

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have too much money tied up in one individual stock. Stoc

Joseph Okaly:

options, you could go to a whol nother level- there's ISOs a

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d nonqualified, and that'd be a whole thing that's really t

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o much to get into here. But st ck options definitely are a go

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d step up in complexity co pared to their restricted st

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ck kind of counterparts.

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The last major one that I want to cover today are stock

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purchase plans. Stock purchase plans, you might see them as

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ESPPs, these plans are essentially stock discount

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plans. So you can buy into your company's stock at a discount.

Joseph Okaly:

So let's say up to maybe 15%, with a holding period that might

Joseph Okaly:

be one to two years. The discount that you're receiving

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is taxed as ordinary income. Gains above that would be taxed

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at the capital gains rate depending on how long you held

Joseph Okaly:

it. So again, let's say that your current stock, your current

Joseph Okaly:

company stock is worth $10 per share. This means that you would

Joseph Okaly:

be able to buy into it at $8.50 per share. Great, so you

Joseph Okaly:

instantly are kind of in the black- you instantly make money.

Joseph Okaly:

But you need to hold it for say one to two years before you can

Joseph Okaly:

sell it, it depends on the company's plan. You know, that's

Joseph Okaly:

great, I'm basically buying in below current price. But again,

Joseph Okaly:

it's the same kind of thing- you are tied in to how one

Joseph Okaly:

individual stock is doing. So while this can be appropriate

Joseph Okaly:

for some people, that is definitely something that needs

Joseph Okaly:

to be considered, and for some people if they keep doing this

Joseph Okaly:

and they don't sell, they can wind up with a huge

Joseph Okaly:

concentration in one company's individual stock. So using this,

Joseph Okaly:

it can be appropriate for people again. However, in my opinion,

Joseph Okaly:

there should be an exit plan that's part of the strategy.

Joseph Okaly:

So lastly, what you can do. The first thing is make sure that

Joseph Okaly:

you're balancing taxes verse concentration. For stock

Joseph Okaly:

options, for instance, maybe you don't want to realize them right

Joseph Okaly:

now, for example, because next year I'm going to be retired.

Joseph Okaly:

And so if I wait to realize them next year, my tax rate might be

Joseph Okaly:

much, much lower. That could definitely be a strategy.

Joseph Okaly:

However, as a trade off, maybe I have 90% of my money now tied up

Joseph Okaly:

in the stock options in this one company. So even though I may

Joseph Okaly:

take a little bit more of a tax hit, maybe I should sell a

Joseph Okaly:

little bit right now because I don't want to be so concentrated

Joseph Okaly:

in how one company is doing. What you can do is really make

Joseph Okaly:

sure you're paying attention to this balance of being tax

Joseph Okaly:

efficient, versus being overly concentrated, and therefore kind

Joseph Okaly:

of exposed to how one company may be doing or proceed to do.

Joseph Okaly:

The second thing for this for what you can do is plan ahead of

Joseph Okaly:

time. Anything that you're receiving, you know it's going

Joseph Okaly:

to be vesting in x amount of years. Depending on what they

Joseph Okaly:

gave you and everything, you know that at some point it's

Joseph Okaly:

going to be coming to you if you stay there. You can think about

Joseph Okaly:

this ahead of time, just like a bonus, what am I going to do

Joseph Okaly:

with this when it comes. Maybe 50% I'm going to cash out and

Joseph Okaly:

save, 25% I'm going to cash out and use for a vacation, the

Joseph Okaly:

other 25% I'm just gonna kind of hold on to. Whatever the plan

Joseph Okaly:

is, you can do that ahead of time. If you wait until it just

Joseph Okaly:

vests and then it sits there, it's going to feel like free

Joseph Okaly:

money, it's going to feel like it just appeared. And now you're

Joseph Okaly:

not considering taxes, or concentration or any larger

Joseph Okaly:

scale plan. You're just seeing that extra money that maybe you

Joseph Okaly:

feel like you found in your pocket, and you might do

Joseph Okaly:

something with it that you might regret. Or maybe you wouldn't

Joseph Okaly:

necessarily take the steps to do if you had thought about it

Joseph Okaly:

ahead of time.

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So a recap today as this really is the hardest topic that we've

Joseph Okaly:

covered so far to this point. These things definitely are

Joseph Okaly:

confusing to everyone, but there are definitely some simplifiable

Joseph Okaly:

takeaways from this depending on what you may have. The two main

Joseph Okaly:

elements again that it comes down to are dealing with taxes

Joseph Okaly:

and concentration. Taxes should be planned for. RSUs, or

Joseph Okaly:

restricted stock, will automatically be taxed as

Joseph Okaly:

ordinary income upon vesting. Stock options and purchase plans

Joseph Okaly:

you have more control on when it is realized, when those taxes

Joseph Okaly:

are realized. Second element is concentration. The restricted

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stock is easier to emotionally diversify out of because they

Joseph Okaly:

are forcing you to realize the tax upon vesting right away. So

Joseph Okaly:

it's not- the tax element kind of gets taken out, and so it may

Joseph Okaly:

be easier to diversify out of it. The other two though, can be

Joseph Okaly:

tempting to hold on to much longer, but again, always

Joseph Okaly:

remember you are paying tax on some of the gain. You're still

Joseph Okaly:

keeping most of it. Individual companies carry very real risk

Joseph Okaly:

that's tied to, again, how one company does or is perceived to

Joseph Okaly:

do. If the CEO has a personal scandal, that company has its

Joseph Okaly:

stock go down, despite the company itself probably really

Joseph Okaly:

not being any different in a business sense yesterday than it

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is today when it was found out.

Joseph Okaly:

Thanks for tuning in today. As always, if you're able to

Joseph Okaly:

implement what we cover, that's fantastic. This episode is

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definitely the most challenging to do that. But if you can, you

Joseph Okaly:

have less to worry about than before, and obviously you can

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focus more on enjoying life. If you are wanting help with these

Joseph Okaly:

things though, or have questions you need help in clarifying,

Joseph Okaly:

check out the 'Ask Joe' section on the show's website. Again,

Joseph Okaly:

our website is www . enjoy more 30s .com, that's enjoy more

Joseph Okaly:

three zero s .com. If you enjoyed this episode, please

Joseph Okaly:

make sure to follow us and review us on Apple podcasts or

Joseph Okaly:

wherever you listen. There are literally millions of young

Joseph Okaly:

American families out there I'm trying to reach and help just

Joseph Okaly:

like you. This is the final episode. The recap, though, is

Joseph Okaly:

coming next week of this "Your Money Multiplier" series. And

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like the last series, it's a time to take a breather, review

Joseph Okaly:

the last number of topics and hopefully take some level of

Joseph Okaly:

action, whatever it might be, to improve your financial situation

Joseph Okaly:

in a way that removes anxiety to allow you and your family to

Joseph Okaly:

focus more on enjoying life. And we never want to be losing sight

Joseph Okaly:

of the purpose of all these episodes. This series, unlike

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the first one, was much more specific on different financial

Joseph Okaly:

topics and areas you may be dealing with. But the purpose is

Joseph Okaly:

still the same- to gain greater clarity and security about where

Joseph Okaly:

you are going, to have that confidence to go out and live

Joseph Okaly:

life. It's great as always connecting with you today and I

Joseph Okaly:

look forward to doing again so soon.

Voiceover Audio:

The conversations on this show are

Voiceover Audio:

Joe's opinions and provided for general information purposes

Voiceover Audio:

only. They do not constitute accounting, legal, tax or other

Voiceover Audio:

professional advice for your specific situation. You should

Voiceover Audio:

always seek appropriate advice from a financial advisor,

Voiceover Audio:

accountant, lawyer or other professional before acting upon

Voiceover Audio:

any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS securities Inc, and TFS advisory services an SEC

Voiceover Audio:

registered investment advisor member FINRA/SIPC.

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