Thursday, June 30, 2005

The 401k Connection

I started down my road to financial emancipation today by maxing out my 401k. You'd think I'd have done this already considering I have been working for a few years now but no I was working off some kind of a "bird in the hand is worth two in the bushes" theory. Sadly that doesn't really work with money. Yet, despite knowing that I was finding it really hard to part with yet another piece of my paycheck. That is until I found an online 401k calculator.

6/28/2017 account value at maximum contribution = $428,558.93

That's almost $100,000 more in just 12 years. Sometimes it really helps to see the numbers. Maybe it's the way I approach money. When I see $200 I don't think "Ooh. $200. I can save it!" I think "Oh. $200. I can spend it." So in order to decide to save something I have to sell myself on it. And thanks to the lovely people at bloomberg.com who put up that calculator, I just did.

My research on 401k yielded such fabulous results that I decided to spend some time reading up on ESPPs. Simply put ESPPs or Employee Stock Purchase Plans offer employees company stock at a discount (typically 10% to 15%). There is a holding period (typically 3 to 6 months) during which they take a certain percentage of your salary out of your paycheck every pay period and put it into an account. The stock price is locked for you either on the day the holding period starts or the day on which it ends (sometimes it's the lower of the two). At the end of the holding period the money is taken out of the account and company shares are purchased for you at a 10% to 15% (whatever your discount is) discount of the locked stock price.

I have always heard that it's better to avoid company stocks because you don't want to put all your eggs in one basket. That makes sense. Guess what happens if your company goes belly up when you are holding a bunch of company stocks? You lose your job and your savings too. But turns out ESPPs are a little different than owning straight stock. By selling your shares as soon as they become available you can not only mitigate the risk of investing in company stocks but you can almost always make a profit because you are already buying at a discounted price. Cool, huh?

Of course, every ESPP is different and you have to be disciplined about selling so I need to give this a little more thought before I am fully committed. For now I just went ahead and signed up. Under my ESPP I have till Aug 31 to pull out so I am not losing anything and as an added bonus it gives me two months to test drive a smaller paycheck.

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