Looking for advice on this ESPP my company recently introduced. We’re in a good spot financially with a solid emergency fund, and I’m already putting 14% into my 401k. Here’s the breakdown:
“Earlier this year, after our IPO, the company opened up an employee stock purchase plan (ESPP) with a discount for U.S. employees.”
ESPP Details
Contribute 1%-15% of after-tax pay through payroll deductions
Funds build up over a 6-month period and are then used to buy company stock at a 15% discount
You can reduce contributions to 0% or pull out for a full refund up to two weeks before the purchase date
A 15% discount is basically free money. Usually, with ESPP, you’re putting in contributions over six months, and at the end, you make the purchase. So even on the first dollar you contribute, you’re getting a great return. I’d max out this program if you can!
Harlyn said: @Neely
I’m already putting 15% into my 401k, which is about my limit. Would it be smart to reduce the 401k for the ESPP? What’s a good balance?
Think of it this way: with ESPP, you’re usually free to sell the stock shortly after the purchase, so it’s accessible compared to a 401k, where you have to wait until retirement age. If you can swing it, try maxing out both, but ESPP is such a good deal it might even be worth considering a short-term loan just to take full advantage.
I’m in a similar plan at my job, with a 15% discount as well. Like others have mentioned, it’s essentially free money if you can swing it. You’ll contribute over six months, buy at a discount, and then you can usually sell to cash out the profit.
The tricky part is going without that 15% of your income for six months, but if you can budget for that, it’s definitely worth it. I wouldn’t recommend decreasing your 401(k) contribution for this, though. Instead, try to trim your budget a bit to cover the ESPP amount and then use the profit for future contributions.
And of course, reinvest the profit somewhere else if possible, like back into an emergency fund, an IRA, or a savings account.