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?
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.
half of that going to taxes
That’s unlikely, unless you’re making millions. Long term capital gains tax caps at 20%, and short-term capital gains are taxes as income, and most people are around the 12%-24% brackets. The IRS defaults to 22% for bonuses, so that’s a much better number to use for estimates. State taxes vary, but 10% is completely reasonable as a high estimate, so figure 1/3 going to taxes.
That said, nothing is guaranteed. If your company is reasonably stable, buying ESPPs should work out long-term, provided you get them and cash them out consistently. I’d wait a year for the LTCG rate personally, and sell them regardless of how they’ve done. If they went down, take a capital loss as a tax deduction, and if they go up, take a capital gain. If you follow that strategy as unemotionally as possible, it should work out.
That said, it really depends on the discount, required holding term (ESPPs can be locked up for 3 years), and the rest of your financial situation. I’d definitely place it after you have a basic emergency fund, but if it’s generous enough (i.e. short minimum holding time), I’d maybe consider it as an employer match if you have a fallback plan if you lose your job (e.g. can live w/ family, SO works, etc). But in general, I’d put it after your regular tax-advantaged retirement account contributions, and before regular taxable account contributions, because skew to your portfolio should be minimal long-term if you’re consistently rebalancing into a properly diversified portfolio.
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 don’t see a lot of love here for the ESPP, so I’ll add my perspective. If your company is not prone to large fluctuations, then a quicksale with 15% discount is usually a good investment (if locking your money up for 6 months isn’t a problem).
Even without the min of start/end, it’s giving you a very good shot at 15% benefit for an average investment of ~3 months (your initial contributions are held for 6 months, but your most recent st ourchase for weeks). I don’t know of any investment that can fairly confidently return near 15% in 3 months.
So long as you are confident in your stock, my strategy is:
- contribute to the espp
- quicksale
- withdraw the money (set aside some for taxes if necessary) and invest it into index (assuming all bills/debts are paid off)
Yes, it is taxed as short term gain this way, but your salary/other stock incentives/insurance are likely already tied to your employer, and holding it a year is riskier than quicksale
