First, let mes explain what an ESPP is. This acronym stand for “Employee Stock Purchase Plan“, and it enables an employee to buy their employer’s stock at a discount (up to 15% off the market price during the purchase date).
The basic ideas of an ESPP is that it slowly drawn a certain amount of your salary and holds it for you to purchase company stock at a certain date in the future. My employer does such a purchase on a quarterly schedule. Then at the end of the time-period (again, my employer uses quarters), your employer uses your money that was saved to purchase your employer’s company stock, at a discount mentioned above! Where I work at, the discount is 15%, which is a great!
When the company stock is purchased, the next day I go in and sell the stocks that was purchased by my employer. This gives me an instant 15% rate of return on the money that was saved for the purchase! So to think about it a different way, for those 3 months, I get a 15% gain on the money saved. Mind you, the term is only 3 months and not an entire year! So that 15% return is really better than it seems!
If you hold your shares, only selling them after 2 year, you’ll receive better tax treatment, but I’m more than happy to take the 15% return that my employer offers. Waiting 2 years to sell the shares for better tax treatment seems risky to me.
Not as obvious as the 15% return is the forced saving provided by my employer. Since I paid off my mortgage, I was having problems saving the money for investing. Using the ESPP, my employer is basically saving the money for me, while paying me a 15% to do so! Tell me this isn’t an awesome mechanism or what?
I’ll admit, I’m excited to have my employer pay me to save money! The best part is that my employer does the work of saving the money for me, and then at the end of the quarter pay me 15% return… What’s not to love with is deal?
If your employer has an ESPP, are you taking advantage of it? IMHO, this is one of my best money hacks that I’ve done! If your employer offers this benefit, look into it and the tax treatment of such a plan! Perhaps you’ll view this as a win-win like I do!