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?
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.
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.