How Much Money Should You Contribute To Your ESPP?

April 21, 2023

In this highlight, Bo and Brian explain where your employer stock purchase plan falls into the Financial Order of Operations and how you should make the most out of your employer-offered free money.

Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.


Next up, we’ve got a question from Stitcheroo. He says, “How can I balance my FOO steps? I have an ESPP which I perceive as ‘free money’ in the form of discounted stock. I’m also trying to max my Roth. How much ESPP is too much?” And Stitch, I love that you asked this question. So for those of you that aren’t familiar, an ESPP is just an employer stock purchase plan. You essentially get to buy into the stock of your company, which we love because most often employers will say, “Hey, we’re going to let you buy in, but you don’t have to pay what everybody else pays. We’re going to let you buy it at a discount. You can buy in at 10 percent cheaper or 15% cheaper. We’re going to look at what the price was at the beginning of the quarter and then the price at the end of the quarter, and we’re going to give you the lowest price, and we’re going to let you buy it at that.” Well, if you can buy something for less than it is worth the day, that qualifies as free money. And if you know our Financial Order of Operations, oh yeah, we absolutely love the financial order of operation. So when we get to step two, we say you have to, have to, have to, have to take advantage of your employer-offered free money. Most often, that manifests in the way of an employer match on your retirement contributions, but your employee stock purchase plan is another great example of where free money exists.

So, to Stitch’s question, well, how do I balance the “I want to do Roth, but I got to do this ESPP,” and how much ESPP is too much or is there too much ESPP? How do we talk to someone about what that looks like and how to know?

Yeah, this is a great question. I will tell you it’s a complex question though, and that’s why we do have to get a disclaimer because we don’t know your situation, Stitcheroo. I want to put that out there because this is definitely in the weeds of financial planning, but I think there is a balance here that you’re trying not to get too greedy with it because pigs get fat, hogs get slaughtered. And the fact is, don’t forget when you work for companies, not only is that your income that’s coming in, you do run career risk. That if that employer went out of business, you got to go find another job. So you don’t want to have your entire investment capital tied to the exact same thing that is risky that you’re trying to build independence of. Because I’ve seen people who have built up tremendous success where they make a great income, but then they just get so excited about their employer that they keep loading it up, loading it up. And yes, this is a strategy that could make you extremely wealthy, but it’s also a strategy that can make you extremely poor if the worst-case scenario happens. Think about all these technology companies right now, the household names, the Googles, the Intels, the Facebooks. They’re all laying off right now, and it’s a scary, scary thing. And I’ll tell you there’s even another level where I’ve seen, like nobody here knows the name Lucent anymore, but I worked with those executives. They went to zero. And that’s the thing you do want to be very mindful that there’s two components, and I’ve talked about this a lot. There’s building wealth, but then there’s also this component of keeping wealth.

So you always want to be mindful that there is a risk of drowning in too much of a good thing. The reason is that I would not want to have to be careful, because I typically off the cuff say, “You know, around five percent sounds good.” But if this is such free money, I understand that it’s kind of that that might seem like, “Well, that’s missing out.” So it’s going to be somewhere probably between five to ten percent of your investable assets. You need to be careful if you get into that band of five to ten percent of your net worth, and investable assets are also tied to the same company that’s giving you a monthly paycheck. Can I speak into that a little bit more? Because one of the things that’s really important is whenever you have an employee benefit at your company, you need to understand how it works because not all ESPP plans work the exact same. So, if you are someone who can participate in the ESPP, but maybe you also get RSUs, and you have options that sit out there, and you have these other incentives that cause you to be super-concentrated, there’s nothing that says, in a number of plans, that you can’t participate in ESPP and then already know when you’re going to sell just because you’re participating, just because you’re buying. If your plan allows it, it’s okay to get on the travel to where you’re selling now. Yeah, if you sell inside of a year and it’s a disqualifying disposition, maybe the tax treatment isn’t quite as favorable as it would be, but remember the goal is the free money. So, even if you have to pay tax on free money, you’re still coming out ahead on that. So, Stitcher roof, if you’re in that situation where you can participate in the ESPP and then also have a plan on the back end of how you’re divesting out of your employer stock, as you divest out of that, you can then take those dollars to continue on in the foo, doing things like maxing out your Roth IRA, putting money into your HSA. So, your ESPP may be a very short stop just to make sure that you can capitalize on that free money, and then you get off the treadmill and deploy those dollars elsewhere. Not all plans will let you do that. In some corporate culture, they say, “Hey, if you’re selling our stock, that ain’t a good thing. Don’t do it.” You have to know that, but I would become intimately familiar with my plan to figure out what options are available to me. Yeah, and for another day, we can talk about making sure you take advantage of long-term capital gains versus short-term. There are all kinds of cool strategies that you can layer into these things as well.

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