There’s a pretty popular savings chart in the personal finance community, and I just noticed it seems to be missing the option for when your employer offers an ESPP (Employee Stock Purchase Plan) unless I’m completely missing it.
Where would you guys put it if you could add it to this chart?
ESPP is only really done in huge companies, and the terms vary too widely to be added to a common calculator. When I had one, though, I could sell right away. And the purchase price had a few different ways of being calculated, and they applied whichever was lower, so sometimes my effective discount was 25% or more.
I just cranked that shit up to the max, and sold most of it right away. I kept a small portion from each purchase as a side investment, just in case they screwed me over. I considered it my own personal severance plan, built up essentially for free.
Definitely. Mine is basically min(first_day, last_day) over a 6 month period. Able to sell right away and 15% discount.
I think it’s much harder to add something like an ESPP to this kind of generic flowchart. There are too many ways to vary it, not to mention it’s a single investment in a single company. It would be hard to specify even a single category of stock to invest in that would apply to anyone at any time, let alone a single company. If you ask me about an ESPP for 10 different companies, I’d have 10 different answers.
Something like a 401k is fairly similar everywhere. You can’t recommend specific funds but nearly all 401k’s will have roughly the same options available and the vesting and matching options follow one of a handful of schemes so you can safely make a recommendation there without the specifics having a large impact on the outcome.
Ultimately, an ESPP is a taxable account and you would apply it there (at the end), if anywhere. Like any other individual stock, it should be considered as part of your overall portfolio. For example, if you work at a large cap tech firm, you may want to account for the additional risk you’re taking on by reducing your large cap investment and expanding other categories (note, this is not a perfect balance and is by no means a recommendation).
If you choose to manually build a portfolio (as opposed to a three- or four-fund portfolio) or you work with an active manager, you or your manager can fine tune it better.
You already have so much tied to your job that I dislike adding to it.
My understanding of ESPP is that you’re just buying at a reduced rate, say ~10%, and are allowed to sell after N time, say 3 months? So you’re “guaranteed” 10% of what you’re allowed to purchase? Factor in half of that going to taxes and what if the market is down - I had a hard time rationalizing it.
Would be curious where others rank this as well.
Generally agree. And some employers don’t even offer much of a reduction, such as only 5% off. And only after a longer waiting period, like 6 months.
On the tax aspect, I think the most tantalizing part of ESPPs is to get a quick return by selling right after getting the discounted shares. At which point, any positive ROI after short-term taxes is still free money. So while taxes depress the potential gains, it still yields a positive return. But I agree with you that instead of taxes, market movements can easily wipe the gains entirely, and that alone is reason enough to just not bother with 5% or even 10% ESPPs.
It’s never a guarantee and anyone who believes that shouldn’t be investing in the market. But it would also be fair to say many (most?) don’t understand the nuances of an ESPP.
I took part in one when it was available to me. I just built it into my overall risk profile. It was a fairly stable company and our discount was 15%. We had to hold it for two years for the cost basis to show the discount for tax purposes to incentivize holding on to it. It would be extremely unusual for the discount to be wiped out even if you held on to it for two years or more - but as you point out, it’s not impossible. It also came out of payroll so to be honest I couldn’t cut a ton out of every paycheck anyway, at least not without sacrificing other parts of the portfolio and increasing my overall risk.
It’s not just a free bonus but I think it can be a good way to get a little boost as long as you consider your whole portfolio and how any restrictions may affect that return.
