Author Topic: Max out 401K, Employee Stock Program, or pay debts?  (Read 6012 times)

ncornilsen

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Max out 401K, Employee Stock Program, or pay debts?
« on: February 01, 2013, 12:00:28 PM »
Hello,

Where I work, I have a few investment avenues I can pursue.
The first is the 401K. They'll match 50% up to a total match amount of 2.5%. So, I put in 5% to get the 2.5% match.
They also have a stock purchase program. Stock is PCP. Great stock to own, excellent growth oppurtunities. They let me buy it at a 15% discount from the lower of the price at Jan 1 of the grant year, or dec 31 of the grant year. Subject to a 10% max contribution. I'm contributing the max allowed 10%. The last two years I've done this, I've never seen less than a 30% year over year gain.
There's also a pension, but I'm sure that'll get axed before long.

Debts are as follows:
$5200 @ 3.24% on my motorcycle. I pay 140/mo on this
$193K @4.5% on my house, house value is 212K. my mortgage has no PMI, and re-fiing seems to cost more per month than the current loan!
$8.5K @7% on my student loans. I pay $130/month on this one.

I get $800 a month from renting out rooms. I have to replace the roof on my house this summer, and am looking to do a DIY addition bathroom to make my house a 3bed 2 bath house... greately increasing the value. I need about 12K for that... which I'm using saved Rent money, tax returns, and some of my stock. I figure the bathroom will add 15K of value to the house, and costs only 8K. (My labor factoring at $0, and 4K of the 12K total is for the roof.)

I project I'll have at least 8500 to 9K about 1 year from now (assuming the stock stays flat) from the stock purchase program. My plan was to cash it out, kill the motorcycle loan (if I have it still), then kill the student loans. Any left-over, invest in a Vangaurd fund.

The other option is, coupled with the increased value in my house from the added bathroom, use this 9K to bring my Loan to value ratio on the house to less than 80%, and re-finance then... if rates haven't crept up to 4.5% by then!

My question is... does this make sense? Should I reduce my contribution toward the stock purchase program and put more in the 401K? I don't like that idea because I can't retire early with that money. I also like the gauranteed 15% return on the stock purchase, which I can then invest in other funds. Any comments?

My goals are to be financially independant enough to retire in 13 years. By retire, I mean able to pursue my own ventures without the need of a day-job. 

RoseRelish

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #1 on: February 01, 2013, 12:45:38 PM »
The 15% discount sounds hard to turn down, but be aware that you are tying your future to the company even more by owning the stock in such large quantities. If the company start to falter not only might you lose your job, but your stock (savings) would be worth less too! Not a good combo.

I'd kill the student loans asap, but the other loans are reasonable for the rate. Obviously good to knock them out at some point, but not as pressing. I'd also contribute to get the employer match. That's a 50% return on your money. Yes, you can't use the money in a 401k until a bit later in life...but it means you have a pile of cash that can grow undisturbed over time. Turning down free money is never a good idea.

ncornilsen

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #2 on: February 03, 2013, 01:38:28 PM »
Yeah, I'm not comfortable tying up all of my net worth with my employer. I've sold the stock as soon as it was possible, and plan to re-invest it in different funds when I'm no longer using that money to pay off debt.

I'm getting all of the free money my employer is willing to match for my 401K, I just don't think I want to do any more than that at this point.


Self-employed-swami

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #3 on: February 03, 2013, 01:51:15 PM »
Are you really going to be able to add rooms to your house, for $12,000?

ncornilsen

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #4 on: February 03, 2013, 02:40:21 PM »
Yes. I have the materials figured out right down to "buy 14 2x6's, cut three boards XX long from the first one, and the drop will work for the header... etc"
I've built part of a house before, have an engineering degree and am a project manager by trade. Anything I can't do, I know people who can and how to prep the site to reduce my cost. The only sketch part of the project is  demoing an old chimney. :)


desrever

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #5 on: February 05, 2013, 09:28:54 AM »
It really depends on the downside risk of the ESPP. What happens if, on the purchase date, the stock is trading below the option price? I.e., can you ever wind up buying shares above the FMV price? And are you guaranteed to be able to do a same-day sale of the resulting shares?

If it's anything like the ESPP of my former employer, you would be crazy not to max it out ... that one pretty much guaranteed you the ability to buy at less than FMV.

Debbie M

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Re: Max out 401K, Employee Stock Program, or pay debts?
« Reply #6 on: February 05, 2013, 12:32:52 PM »
Sounds basically fine, but I'd pay off the student loans before the motorcycle.  The interest rate is more than double.  I know the motorcycle is smaller, so you could pay it off more quickly, but it's not really that much smaller--you can still pay off the loans almost as quickly (unlike, say, the house).  And since you say "loans," you could pay one of them off first to improve your cash flow and the the paid-off-high, then pay off the next one, etc.