Ask the Readers – What Would You Do?
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I have a financial decision coming up and am a little undecided on what course of action I should take. It’s a good decision to have, but I want to make sure I allocate the funds in the most effective way. This month, I’ll be receiving stock shares through my company’s Employee Stock Purchase Plan (ESPP). With these shares comes a few various options of what to do with them. Let’s dive in.
What is an ESPP?
First it’s helpful to define what an ESPP is. Essentially, an ESPP is a stock plan that some publicly traded companies offer where employees can purchase shares of company stock at a discounted rate. These contributions are taken out of each paycheck, then at the end of a period there is a purchase date. On this day, the accumulated funds are used to purchase stock shares at the discounted rate.
In this example we’ll use 15% as the discounted rate, and a 6-month period between purchase dates. Let’s say the stock was trading at $100 at the beginning of the period, and then grew to $120 by the end of the 6 month period. If you had set aside $1,000 the math would work out as follows:
$1,000 / $85 ($100 per share, with the 15% discount) = 11 shares
11 shares x $120 (current share price) = $1320
So, in 6 months, your money grew from $1,000 to $1,320. This is a perfect example of why it’s important to take advantage of contributing to an ESPP if you have access to one. There are more details to consider, such as tax implications and whether the stock price went down during the 6-months, but for the sake of this post we’ll keep things simple.
My Options
Now that we’ve covered what an ESPP is, here’s how it applies to my situation. I’m receiving shares and need to decide what to do with them. Here are the options in consideration:
Option #1 – Hold the shares
With this option, the advantages are that the stock price could go up. Also, by holding the shares longer (usually a period of 1-2 years) my tax rate on them would be lower (taxed as capital gains instead of ordinary income). However, the downside is that the stock price could go down, and I’m less diversified by having the money in one company instead of index funds.
Option #2 – Sell some of the shares, hold some of the shares
This option is similar to #1, but selling some of the shares would help with diversification.
Option #3 – Sell all of the shares, put money in Roth IRA as 2017 contributions
The advantage of this choice is immediately becoming more diversified and utilizing the ability to still make contributions to my Roth IRA for the 2017 tax year.
Option #4 – Sell all of the shares, put money towards car loan ($7,000 left on loan, 1.9% interest rate)
This would help us pay down our debt much more quickly, speeding up our timeline towards debt freedom. However, with the interest rate being so low, this debt doesn’t bother me as much as our student loans did.
Option #5 – Sell all of the shares, split money between Roth IRA and car loan
This would be a hybrid approach between choices #3 and #4, where we work towards both goals at the same time.
What I’m Leaning Towards
Ultimately, similar to many other areas of personal finance, I don’t believe there’s one right answer to this decision. This is why I wanted to open it up and get feedback from my readers. I’m leaning heavily towards Option #3, as I’d rather put the money into index funds and let it grow over time. I think Mrs. Spills is more in favor of Option #4, which would lead to us going with Option #5 and split the money between both goals.
So I’d like to open it up to all of you, what would you do in this scenario? Obviously there are many more details to consider, but in a general sense, how would you handle it?
Related Reading: Is it Better to Pay Off Debt or Invest?
