401k vs. ESPP

skifreek97 · #1 (**permalink**) 12-04-2006, 03:39 PM

Hi All,

I'm pretty new here, but this is really giving me trouble.

I currently have around $25k in CC debt, but i also contribute about 4% of my salary to the 401k, and 4% to the ESPP. My company now matches 50% on the 401k up to a total of $2000 put in by them. I'm having trouble determining my priorities. I currently have a plan for Debt Reduction, and am paying approx $300 above the minimum. I earn $41k/year. Should i increase the 401k until i get the match, and forget about the ESPP? (Btw i also have ISOs which i have not cashed as i am waiting for the stock to go up). Or should i focus more on my debt?

Ima saver · #2 (**permalink**) 12-04-2006, 03:45 PM

What is an ESPP??

rduell · #3 (**permalink**) 12-04-2006, 03:54 PM

I believe it's an Employee Stock Purchase Plan.

skifreek97 · #4 (**permalink**) 12-04-2006, 03:59 PM

Sorry. An ESPP is an Employee Stock Purchase Plan where the company gives you a %15 discount on stock. The money comes out of every check, and at the end of 6 months, they automatically buy shares based on the lower of the 2 prices (beginning or end of the period).

Broken Arrow · #5 (**permalink**) 12-04-2006, 04:03 PM

I'm not too excited about this ESPP business, but I admit I am saying this without knowing anything about your company. Still, I would max the 401k employer contribution and then focus on debt reduction.

disneysteve · #6 (**permalink**) 12-04-2006, 04:23 PM

I agree with Broken Arrow. Don't pass up essentially free money (company match) to invest in the stock, even at a discount.

I would put in the max to the 401K to get the full match. If you want to invest beyond that, open a Roth IRA. If you are able to fully fund that ($4,000/year currently) and still have money to invest, I'd put the rest in the 401K. But if you then wanted to choose the ESPP, that might be ok depending on the stock and your overall portfolio. Remember that you never want any one stock, especially your employer's stock, to be too large a part of your portfolio. Many experts say 20%. I think 10% is an even safer limit.

How much to focus on debt is a judgement call. I certainly don't like the fact that you have 25K in debt on 41K in income, but it sounds like you are being reasonably aggresive in repaying it and have hopefully eliminated any bad habits that led to that debt in the first place. So without knowing more about your situation, I think what I describe above is a reasonable way to go.

creditcardfree · #7 (**permalink**) 12-04-2006, 04:36 PM

I would not continue the ESPP based on your situation.

Before I would suggest that you increase your 401k, I would want to know what your plan for paying off the debt is. Are you taking an extra job, cutting expenses? Are you lowering your interest rates on the CC's? You have a lot of debt based on your income. It may require you to stop your 401k contributions for awhile...I hate to suggest it but it needs to be factored as an option.

kv968 · #8 (**permalink**) 12-04-2006, 05:03 PM

I would say forget the ESPP and put the 8% into the 401k for the 50% match. A couple of questions though...Is the $2000 max the company matches per year or in total? And what is your current credit card interest rate?

Oh yeah, and quit using the CC

LivingAlmostLarge · #9 (**permalink**) 12-04-2006, 06:52 PM

401k to match then debt reduction, though the ESPP is a sweet deal we made 50% on our money this past 6 months.

Hypersion · #10 (**permalink**) 12-04-2006, 07:35 PM

My espp is similar to the OP except I only get a 10% discount. espp are great, almost risk free money. If your espp has a holding period than buying puts or selling short company stock in another brokerage account could limit your potential loss

With no holding period I think you should max your ESPP and sell the share right away. That way you can use that money for a ROTH IRA or to paydown the CC debt.

What the interest rate on the CC debt?

skifreek97 · #11 (**permalink**) 12-04-2006, 09:05 PM

Thanks for all the answers. A large chunk of the debt is at 10% (about 20k), some is at 14% (about 2k) and the rest is about 6%. There is no holding period after the 6 months is up. Currently the stock price is low in my company ~$6/share. I would like to think that it will go up, but not for a couple years.

disneysteve · #12 (**permalink**) 12-05-2006, 06:40 AM

Quote:

Originally Posted by skifreek97

Currently the stock price is low in my company ~$6/share. I would like to think that it will go up, but not for a couple years.

What the current price is really doesn't matter. What matters is how much you paid for it. Did you pay $5.10/share ($6 - 15%) or less? If so, then you've made a profit or at least broken even. I'd consider selling the stock and using the proceeds to help pay off your debt.

CRFSaver · #13 (**permalink**) 12-08-2006, 09:57 AM

Quote:

Originally Posted by Hypersion

My espp is similar to the OP except I only get a 10% discount. espp are great, almost risk free money. If your espp has a holding period than buying puts or selling short company stock in another brokerage account could limit your potential loss

Be very careful with this as it could cost you your job. Many firms have rules against shorting the company stock or purchasing puts or selling calls. Definately check with your HR to make sure you are allowed to do this. Some companies say you can do covered calls/puts, maybe sell short against the box but most companies are very restrictive in this. Presents a moral hazard.

While some allow you to write covered calls to hedge your exposure I have yet to see a company that allows their employee to sell the stock short in any event so please be careful.

Hypersion · #14 (**permalink**) 12-08-2006, 06:49 PM

Quote:

Originally Posted by CRFSaver

Be very careful with this as it could cost you your job. Many firms have rules against shorting the company stock or purchasing puts or selling calls. Definately check with your HR to make sure you are allowed to do this. Some companies say you can do covered calls/puts, maybe sell short against the box but most companies are very restrictive in this. Presents a moral hazard.

While some allow you to write covered calls to hedge your exposure I have yet to see a company that allows their employee to sell the stock short in any event so please be careful.

If you are an "insider" than this might be problem. But how would a company find out about a low/mid level employee shorting stock?

disneysteve · #15 (**permalink**) 12-08-2006, 09:49 PM

Quote:

Originally Posted by Hypersion

If you are an "insider" than this might be problem. But how would a company find out about a low/mid level employee shorting stock?

A friend of mine used to work for Merrill Lynch. He was not allowed to maintain a brokerage account with any company other than Merrill. I'm not positive how they enforced that, but they did.