An Employee Stock Purchase Plan (ESPP) allows employees to purchase shares of company stock via automated payroll deductions at a discount. That sentence alone, when taken apart, outlines the case for the benefits of participating in an ESPP.
We know investing is the one area where people don’t like sales. If we’re shopping for clothes and a new jacket is 30% off, that sounds like a good deal. If stocks are 30% off – in other words, the market is down 30% - that just does not feel like an equally good deal. Why? I think it’s because you’re looking into the future; unsure if that sale on stocks is going to be a good deal or if we would have been able to purchase those same stocks for 40% off had you waited.
What if, though, you could get a head start on those returns? For instance, you could buy stock today and, even if the stock goes down by 10% over the next year, your investment may still be positive? That’s the benefit of an ESPP.
Not only does an ESPP allow you to acquire shares at a discount but it also makes buying those shares easy. Utilizing an ESPP allows you to automate your savings, always a good idea, by setting up contributions through payroll. Think about your 401k. Every paycheck, a portion is removed and contributed to your 401k for the future. How often do you think about that contribution? Once set up, do you even miss that money? Most likely (hopefully), you’ve come to build your lifestyle around the net amount of your paycheck, so money you don’t see, you don’t spend. It’s for this reason that 401k plans are often the largest investment account for most people. Think if you had to write a check each month to your 401k plan. How much smaller would 401k balances be? An ESPP promotes the same behavior by making the choice once, the choice to save, rather than having to make the choice again and again each month.
Maybe the concept of making that one-time decision to participate is challenging. If consciously reducing your take home pay makes you question whether you’ll be able to continue living the lifestyle you enjoy, think about other areas where you can supplement that income. Do you also have RSUs that vest each year? Have you been holding those shares because you’re not sure what to do with them? Consider selling those shares when the vest (you’re already paying taxes on those shares anyway) and using the proceeds to supplement what is being contributed to your ESPP. Doing so allows you to take full advantage of the benefits being offered.