The benefits of ESPPs and how to maximize your investments from Cordant Wealth Partners’ President and CEO.
If you’re like most employees, you want to build wealth by investing in your company’s stock. But if you haven’t taken advantage of an employee stock purchase plan (ESPP), there might be a good reason: you don’t know what they are or how they work.
According to a recent Deloitte survey, nearly three-quarters of public companies offer an ESPP.
An ESPP is an excellent way for employees to build wealth by investing in their company’s stock, but only if they understand how it works and whether it makes sense for them personally.
To understand how an ESPP works and how to make the most of it, we talked to Isaac Presley – President and CEO of Cordant Wealth Partners, an advisory firm specializing in working with Tech Professionals with Equity Comp.
Isaac is a well-known leader in the investing and wealth management world. He frequently writes and speaks on investing and industry topics, and his work has appeared in Bloomberg, US News, Yahoo Finance, Business Insider, and Wealth Management magazine.
In this article, we’ll share what an ESPP is, how it works and why it’s so useful!
What is an ESPP?
An employee stock purchase plan (ESPP) is an employer-provided benefit that allows you to purchase shares of your company’s stock at a discounted price. You pay for the shares by contributing to your ESPP through automatic payroll deductions. The actual purchase usually happens every three or six months using the accumulated payroll deductions.
“When you hear ESPP you should think: free money.”
– Isaac Presley
When asked what comes to mind when Isaac hears ESPP, he says – free money. With 10-15% being the common discount offered to employees with an ESPP, you should also think, free money.
“If I offered to sell you a $100 bill for $85, would you buy the $100 bill? Well, assuming you can come up with $85 you should buy that $100 bill.”
– Isaac Presley
How Does an ESPP Work?
Similar to a 401(k), ESPP contributions are automatically deducted from your paycheck. The difference is your ESPP contributions are withheld from your after-tax income, unlike regular 401(k) contributions.
The key benefit of an ESPP is that you can purchase shares of your company’s stock at a predetermined discount, often up to 15%. You can usually sell these shares immediately for full market value.
Also see: Everything You Need to Know Before Selling Your ESPP Shares
Should I Invest in my Employee Stock Purchase Plan?
Yes, if you can afford to do so, you should definitely take advantage of your ESPP. Not only can it help you build wealth and fast-track your personal financial goals, but it can also be a great way to give yourself a raise without having to talk to your boss. “If you can, you should take the $100 bill every time.” says Isaac Presley
“If you can, you should take the $100 bill every time.” – Isaac Presley
According to Isaac, there are two main barriers when it comes to participating in an employee stock purchase plan – education and cash flow.
Some employees may not know they have an ESPP, and how it works, or they may be skeptical about it because it sounds too good to be true.
Another barrier is cash flow; some employees can’t afford the monthly or bi-weekly payroll deductions to participate in their ESPP because they have other financial obligations (student loans, credit card payments, rent, etc).
Keep in mind that your paycheck will be reduced by the amount of your contribution when you participate in an ESPP.
Benny is here to help.
Benny gives you cash to participate in an ESPP without impacting your take-home pay, so you can make the most of your ESPP while keeping more money in your pocket.
Can I still contribute to a 401(k) if I participate in an ESPP?
Yes, you can participate in both plans at once! Your 401(k) and ESPP are two of the best tools that help you build wealth and save for retirement. If you can afford to do so, you should participate in both.
What should I consider when deciding whether or not to participate in an ESPP?
If you’re wondering if you should participate in your ESPP, Isaac has a few factors he thinks you should consider:
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- Understand how it works
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- Understand the time periods
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- How much money will come out each pay period
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- When the plan ends
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- When you’ll have access to the money
Isaac advises his clients to understand their own cash flow and budget when participating in an ESPP. You should ask yourself three questions:
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- How are you going to pay for this?
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- What does this mean in terms of your other financial contributions?
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- What are you going to use the money for?
“An employee stock purchase plan can be a powerful short-term savings vehicle”
– Isaac Presley
Isaac says that since most of the time people have a short-term saving goal they’re working towards, this is where the ESPP is powerful. In a lot of companies you’re putting $85 in and getting $100 out every three or six months – that’s a return on your money that’s much better than anything you’re getting at a bank. Whether you’re using the money for a down payment on a house, saving for a kid’s college, or saving for another short-term goal, you should be clear on what the money will be used for. You should have a plan for when the ESPP terminates and have a plan to liquidate the shares and use them for that goal.
Should I sell my ESPP shares right away or hold on to them?
Isaac will generally advise his clients to sell the shares right away.
According to Isaac, research and data shows that most of the time the odds are not in your favor when it comes to holding onto any one individual stock.
Isaac shared these eye-opening statistics with us:
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- On average, around 40% of the time, an individual stock will lose money.
- Almost 20% of individual stocks lose three-quarters of their value
- Most individual stocks (about 65%) have underperformed broad indexes.
- Most of the gains from the stock market in general will come from the top 25% of companies, so if your company is not in the top 25% the chances are you’re not going to make money on that individual stock.
“Generally our advice is to sell, diversify, and invest in a portfolio where you have better odds.”
– Isaac Presley
The caveat to that is if you have holding requirements, where you’re required to accumulate and hold a certain number of shares in your employer, you may consider holding on to ESPPs instead of RSUs, since once RSUs vest they have no tax advantages.
Contributing to Your ESPP Just Got Easier
When asked his thoughts on leveraging a service like Benny, Isaac says the biggest benefit is for a person who understands how their ESPP works and wants to contribute to their plan, but life just doesn’t allow for it right now with other expenses and demands on their cash flow.
“Benny is a good solution that still allows them to participate in the benefit of an ESPP without the drain on their cash flow.”
– Isaac Presley
Benny makes participating in your ESPP easy and accessible, no matter what your current financial situation is. We give you cash to max out your ESPP benefit so you can take full advantage of your earning potential.
Use our calculator below to figure out how Benny can help boost your earnings!