Why you should opt IN if your employer offers you an ESPP (usually)

A few years ago, an email was sent out to all employees where I worked about an 'Employee Stock Purchase Plan' (ESPP). I quickly ignored the email because it looked like a hassle to sign up for.

Six months went by and I found myself talking to a co-worker who had signed up for the ESPP program. I asked him how it went.

"It's free money!" he exclaimed. So I started to dig deeper. How does it work? Is there any chance I could lose money? Those were my two questions.

He explained it to me and then I met with a few other co-workers about it as well. It turns out, the program was essentially a guaranteed 15% gain. Here is how my ESPP worked:

The company would take 15% of my salary and put it toward the fund. That means 15% of my paycheck was immediately dispersed into my ESPP account. At the end of a the 6 month period, I bought the shares of company stock at 15% below the lowest point the stock had been with the money I had invested, and was able to sell at the current share price. Here is an example:

Employee makes 60k per year. This means they can invest 15% of 30k every 6 months, which totals to $4,500. Let's say the stock that they are buying's lowest point was $5 and its current value was $6 after 6 months. The employee would automatically buy the shares at 15% below the $5 lowest point, which is $4.25. That means they can buy 1,058.82 shares. They can then sell all these shares at $6, for a total of $6,352.94. This is a net gain of $1,852.94 in 6 months, and all the employee had to do was withhold 15% of their paycheck.

This works well for three reasons:
  • Guaranteed financial growth 
  • More profitable than a 401k or IRA
  • Gets you in the habit of saving 15% a month
The third reason may be the most important one. Some people I know could easily save 15% of their income a month - they just choose not to. They see the extra money in their account and start thinking of all the different ways they can spend it, and sure enough it's gone in the next few days. Getting it automatically taken out from their paycheck doesn't allow them to see it in their account.   

Some companies' ESPP programs may be different. Before investing in an ESPP, always check with an appointed adviser within the company. Make sure you have a good understanding of how the program works. There is more information here

If you have done an ESPP program, let me know about your experience in the comment section. 

Comments

  1. Hi Evan, Congrats on another clear description of a potentially profitable financial opportunity in the ESPP. I have a question about being added as a follower: I think I added myself today by clicking "follow" at the top left and then entering my Google account user name. Did you get this? Also, will your blog send automatic alerts of your new blog postings to my e-mail?

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  2. Yes dad, I saw that you followed me lol. I do not know if it sends automatic alerts, you may have to subscribe.

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