Money management for startup employees

10 MIN READEditorial Policy

When you’re working at a startup, it’s pretty easy for money to take a backseat to more pressing priorities like putting in a 12-hour workday, maintaining your personal life, and has it really been a month since you’ve done laundry? But with the uncertainty of startup employment, the accounting quagmire of exercising options, and the relative youth of many startup employees, an understanding of personal finance is crucial.

Most foundational money management guides cover the basics – credit and debit cards, budgeting, introductory investing, that kind of thing. And while these are all important, they usually don’t discuss topics exclusive to startup employees, like tax treatment of stock options and how to handle a high-salary, high-turnover gig. We’ll go over four key areas of startup personal finance that your average money primer won’t tell you.

Set up an emergency fund. Right. Now.

Say your startup loses traction, you’re in a hostile or dead-end work environment, or you need to quit for personal reasons. An emergency fund will help see you through unexpected periods of unemployment. Many financial experts recommend that you set aside enough money to last 3-6 months without income, and ensure that money is easily accessible (e.g. in a high-yield checking or money market account). When you’re calculating your monthly expenses, keep in mind ways you can reduce your spending, like moving to a lower-rent apartment. Setting up an emergency fund should be second among your financial priorities, after meeting the minimum payment on your debts.

Now, emergency funds are important for pretty much anyone. Why do they matter more for startup employees? Well, first off, startups are much, much more likely to fail than blue-chip companies. If funding is tight or revenue drops unexpectedly, payroll is often the first expense to be reduced. Startups’ risky nature makes having a safety net all the more important. Other startup-specific quirks may drastically change your spending habits:

  • You may need to unexpectedly exercise your vested stock options. Most contracts stipulate that you must exercise your stock options soon after leaving the company (typically 90 days). You can read more about startup equity here, but for now, let’s just say it can be expensive.

  • Free startup perks won’t be free anymore. If you have a company-subsidized gym membership, commuter benefits, or free food, prepare to pay more or do without.

  • You may be responsible for employer-subsidized health insurance premiums in full. Some companies will pay for all or part of their employees’ medical, dental, and vision health insurance premiums. If you leave your job and continue your insurance through COBRA, you may be paying hundreds of dollars per month in insurance premiums.

Startups, moreso than other established businesses, fall victim to changing market conditions or simple bad luck. Insulate yourself by establishing an emergency fund.

Figure out life in a high-cost startup city

Many startup jobs are in expensive cities, like the Bay Area, New York, or Boston, or are based in cities where rent is rapidly rising. Learning how to navigate a booming city is essential for any startup employee facing sky-high costs. Here are three tips to get you started.

Bake cost of living into your salary

A $75,000 salary in Des Moines isn’t the same thing as a $75,000 salary in San Francisco. The former gives you enough money to pay rent and living expenses, as well as contribute to your 401(k), pay off student loans, or put money away for a down payment. The latter – well, after taxes, you’ll barely have enough to live in the city. If you’re considering job offers from different regions, you should use cost of living as a bargaining chip to negotiate a higher salary in more expensive areas. This calculator can serve as a jumping-off point.

Don’t over-commit to expensive housing

Most personal finance experts recommend that you spend no more than 33% of your pre-tax income on rent or 28% on a mortgage. However, if you have debts to pay, you’ll want to reduce that percentage. This is especially important when you lock yourself into a long lease – it puts you at risk if you lose your job. It’s easier to justify spending a little extra on a month-to-month arrangement rather than a yearlong lease.

Time your bill payments and retirement contributions

If you have a tendency to overspend, set up your credit card and student loan payments to automatically withdraw from your checking account right after you get paid. That way, you won’t be tempted to spend money you don’t have. Along the same lines, enrolling in automatic 401(k) contributions is also a good idea – that way, you’ll have automatically met your saving and debt payoff goals.

Keep a separate account for discretionary spending

If you can’t time your payments (or need a buffer for cash flow reasons), another option is to open a separate checking account for luxuries like eating out or entertainment. Humans aren’t great at making good financial decisions in the moment, and a firewall between your must-have money and nice-to-have money helps you stick to your budget.

Balance between paying debts and saving wisely

A common mistake among younger workers is to put money into investment accounts without maxing out retirement contributions. Not only is it important to save for retirement early, but you might also miss out on free money through employer-matched 401(k) contributions, and you’ll definitely miss out on tax advantages. Generally speaking, this is the best order to allocate your savings:

  1. Minimum payments on debts

  2. Emergency fund

  3. High-interest debts (e.g. credit cards)

  4. Employer-matched 401(k), up to the contribution limit

  5. IRA and/or non-matched 401(k), up to the contribution limit – you can contribute to both an IRA and a 401(k)

  6. Regular stock market investments

  7. Low-interest debts (e.g. mortgages)

You should make it a point to regularly move extra money (beyond your emergency fund, of course) from checking or savings accounts into investment accounts. That way, you’ll be getting decent returns on your money rather than having it languish in 0.1% yield accounts.v

Additional reading:

Understand startup employee benefits (and advocate for yourself)

Finally, know what financial benefits your company offers, and consider asking for the ones it doesn’t. We already mentioned the importance of contributing to 401(k)’s; if your startup doesn’t offer one, consider sending this guide over to HR. (Turns out that tax-wise, 401(k) matching beats higher compensation for both employer and employee).

Another win-win is commuter benefits: You can set aside a certain amount of money pre-tax for bus fare, parking, etc. This will also hopefully help you make sure you’re not overspending on Lyfts and Ubers!

Finally, take a look at your employer-provided health insurance (if applicable). Subsidized premiums can offer huge savings, especially if you’re under 26 and are the last dependent on your parents’ health insurance.

Personal finance for startup employees goes far beyond just putting your money in a robo-advised fund. Saving money and establishing good systems now will quite literally pay huge dividends down the line.

Additional reading:

Image credit: StockSnap

Anisha Sekar has written for U.S. News and Marketwatch, and her work has been cited in Time, Marketplace, CNN and more. A personal finance enthusiast, she led NerdWallet's credit and debit card business, and currently writes about everything from getting out of debt to choosing the best health insurance plan.

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