Lesson #147-Looking at your employee benefits-Employee Stock Purchase Program
One of the most overlooked areas when it comes to our finances, is the area of benefits supplied by our employer. The reason is it is overlooked is because they are usually discussed very briefly on the first day you start the job, and all the information is in a packet that you just put in the corner of your desk . . . never to be seen of again.
But depending on your employer the benefits package can be a big boost to your overall finances. Some of the things that could potentially be included in your benefits package are:
Today on the show we are going to start a new series on looking at some of those benefits and make you aware of other one’s that you may have overlooked.
This lesson we are breaking down Employee Stock Purchase Plans or ESPP. I did a recap of my experience with ESPP’s back in 2011, but I thought today I would do an updated one and discuss the pro’s and con’s of each and if they are a good fit for you.
ESPP’s are company run programs that allow employee to purchase shares of that company at a discounted rate, usually anywhere between 5-15%. The employee contributes money through payroll deductions each pay period. After a specific period that money that you have been accumulating is taken and purchased shares of stock at a discounted rate.
They can be a benefit to you in either one of two ways. The first is through a long term investment tool and the second as a way to earn some quick cash, as long as there are no restrictions on when you can sell your stock.
What I currently do at my employer is I contribute $5,000 a quarter ($1,667 a month) into my ESPP. At the end of each quarter (4 times a year) that $5,000 is taken and used to purchase shares at a 10% discount. So for example is the stock closes at $20 at the end of the quarter the $5,000 will buy 277.78 shares of company stock ($20 x 90% prices equal $18 a share, $5,000 divided by $18). After it is posted to my account, I then turn around and sell the stock for a profit.
So for example I sell the 277.78 shares at $20 and have a gross of $5,555.56 (277.78 X $20). After you take out my basis of $5,000 you are left with a nice $555.56 profit. I then take that original $5,000 and put it back in my operating account, so in essence I’m really not contributing $20,000 of my pay into the stock, it is really $5,000 continually recycled.
So that’s how my companies program works, but what are the downsides. The first you need to know is what the period between when you can buy and when you can sell. For me it takes about 3 business days for the stock to be purchased to when it posts to my account and I can sell it. That is a small enough risk that there isn’t a lot of volatility. But I do know of some companies that require a holding period in terms of months of when you can sell. For me if that period is anything more than a week, I’m passing because I don’t want to take the risk.
Also the higher the percentage discount the better. Since my discount rate is 10% that is not as bad of return. But at 5% the return isn’t worth the risk in my opinion.
Before you consider whether or not this is right for you, take into account these considerations:
I use my companies ESPP as a way to get quick cash, but theoretically I could use this as an investment tool. In that case I wouldn’t sell right away, I would just instead lower my contribution amount, I can’t afford to purchase $20,000 worth of stock a year, and just let the stock value appreciate.
But for me that is too much risk. I don’t like having investment in single stock as they are usually pretty volatile. But if you do go this route, I’d recommend it being no more than 10% of your total investment portfolio. Also depending when you sell you may be taxed on any gain so make sure you understand the tax consequences before you sell.
Be out of debt
You are contributing money up front in advance of the purchase, so if you are in debt I wouldn’t recommend doing this because the money could be better used towards paying off any debt you may have.
In addition you are also balancing money so I’d be out of debt and make sure I had a strong control of my finances before trying to juggle money around.
Have an emergency Fund
Like I mentioned earlier, you are contributing money upfront before you make a purchase and I don’t want my emergency fund hung up in the stock market. I want it where I can get it if a financial emergency actually occurs.
If you do participate in an ESPP, this should be taking a risk money, not emergency fund cash.
The key in all of this is to know the type of plan your companies ESPP is. Find out what the discount rate it, the amount of times a year you purchase stock, and how long before you can sell the stock without penalty are key things to determine before you do any work.
With that being said, I normally make an extra $2,000 a year in cash by doing this. Yes I have to sit aside $5,000 but the ~$2,000 a year gain equals out to be an approximate 40% return on that money. You really can’t beat that. But again it is because my companies ESPP works for my situation, we don’t have any debt, and we have a full emergency fund.
Other resources mentioned on the show:
To send in your questions email me at Jon@JWFinancialCoaching.com
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“Don’t put all your eggs in one basket” ~ Warren Buffett
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