Author Topic: Pay off 0% debt to invest more in ESPP?  (Read 2968 times)

jesstach

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Pay off 0% debt to invest more in ESPP?
« on: April 07, 2015, 04:59:20 PM »
I have $4,500 debt at 0% and monthly payments are $232.

Breakout:
Loan 1 (school loan): $2,330 (monthly payment $72) - 0.1% interest - 33 payments remaining
Loan 2 (consumer): $2,214 (monthly payment $160) - 0% interest - 14 payments remaining

I have just been paying the minimum monthly payments on these since it is ~0% interest.

I will be getting a bonus/stock vesting in May for about $6k. My company offers an ESPP that is a 15% discount on the lower of the stock price at the beginning or end of offering period (6 months). We can contribute a max of 15% of our salary and I'm currently contributing 9%. Even if the stock price goes down in the offering period, I'm making ~17% gain. I always sell the stock immediately to lock in the gain, and I then invest in VTI.

Option 1:
Invest $6k bonus in VTI, continue to pay minimum on debt and contribute 9% to ESPP.

Option 2:
Pay off $4,544 in debt, invest remaining $1,456 in VTI, and up the ESPP contribution by $216/mo (to 12% of pay) for next offering period, which will begin on August 1st.

I'm trying to decide if it's worth losing out on VTI investment returns of the extra $4,544 investing in Option 1, to be able to invest more in the ESPP earlier. I'd otherwise have to wait until debt is paid off or I get a raise at work before I can up the ESPP contribution %. With Option 2, I'm contributing an extra $1,296 every 6 months and gaining at least 17% ($220). I'm thinking that Option 2 is better because it is a little less risky than VTI and the return is potentially greater with the discount. Can someone give me a sanity check please? :)

nanu

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Re: Pay off 0% debt to invest more in ESPP?
« Reply #1 on: April 07, 2015, 05:07:46 PM »
Option 3: Buy $1456 of VTI, put the $4544 in a savings account that gives 1% (Capital One 360/Ally bank). Pay the monthly payments out of the savings account and up the ESPP contribution.
This will definitely give you a better payout than option 2.

But is it better than option 1? That depends - do you prefer to put money in a savings account or into VTI? If VTI, go with option 1, otherwise go with option 3.

MDM

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Re: Pay off 0% debt to invest more in ESPP?
« Reply #2 on: April 07, 2015, 05:13:30 PM »
Option 3:
 a) Increase ESPP contribution by $432/mo to the maximum 15%
 b) Continue to pay the minimum on the loans, provided they will be fully paid before (retroactive?) interest kicks in
 c) Increase (start?) your 401k and IRA contributions as high as you can (limited by your cash flow or IRS rules, whichever is lower)
 d) Then, and only then, contribute whatever is left over to after-tax VTI

Also - do you have the ability to contribute to an HSA?

jesstach

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Re: Pay off 0% debt to invest more in ESPP?
« Reply #3 on: April 07, 2015, 06:20:51 PM »
Option 3:
 a) Increase ESPP contribution by $432/mo to the maximum 15%
 b) Continue to pay the minimum on the loans, provided they will be fully paid before (retroactive?) interest kicks in
 c) Increase (start?) your 401k and IRA contributions as high as you can (limited by your cash flow or IRS rules, whichever is lower)
 d) Then, and only then, contribute whatever is left over to after-tax VTI

Also - do you have the ability to contribute to an HSA?

Thanks for your replies.

More info: I'm already contributing max to 401k. School loan has no retroactive interest rate. Consumer loan does but I'm scheduled to pay it off prior to that date. This year I've contributed $3,550 to Roth IRA, so I need to put another $1,950 in.

Are you saying to fund the increase in ESPP with my $6k bonus/stock? I could contribute the remaining $1,950 to Roth IRA, then i would need $2,600 to fund the increase in ESPP for 6 months. Would have $1,400 to invest in VTI. At the end of the 6 month period, I'd sell the ESPP shares and keep another $2,600 to fund the next round.

Difference:
15% ESPP = 14,000/yr contributions = at least $2380 gain
9% ESPP = 8,400/yr contributions = at least $1428 gain
Difference of $952 gain

The difference in ESPP gain seems worth it to keep the $2,600 cash (or in 1% savings account) to fund it. Thoughts?

Oh, and not eligible for an HSA.
« Last Edit: April 07, 2015, 06:25:58 PM by jesstach »

MDM

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Re: Pay off 0% debt to invest more in ESPP?
« Reply #4 on: April 07, 2015, 09:12:26 PM »
More info: I'm already contributing max to 401k. School loan has no retroactive interest rate. Consumer loan does but I'm scheduled to pay it off prior to that date.
Excellent on all counts! 

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This year I've contributed $3,550 to Roth IRA, so I need to put another $1,950 in.
If 3% = $216/mo, that makes annual salary = $86,400.  Subtract the $18K for the 401k and you are at $68,400.  Subtract any pre-tax insurance, FSA, etc. and you are...somewhere in the traditional IRA phase-out range, and in the 25% marginal bracket.  Depending on exactly where in the phase-out, it could be worthwhile to put what you can into a traditional IRA because you'll save 25% of that amount in taxes.

Quote
Are you saying to fund the increase in ESPP with my $6k bonus/stock? I could contribute the remaining $1,950 to Roth IRA, then i would need $2,600 to fund the increase in ESPP for 6 months. Would have $1,400 to invest in VTI. At the end of the 6 month period, I'd sell the ESPP shares and keep another $2,600 to fund the next round.

Difference:
15% ESPP = 14,000/yr contributions = at least $2380 gain
9% ESPP = 8,400/yr contributions = at least $1428 gain
Difference of $952 gain

The difference in ESPP gain seems worth it to keep the $2,600 cash (or in 1% savings account) to fund it. Thoughts?
Yes, that's it exactly.

jesstach

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Re: Pay off 0% debt to invest more in ESPP?
« Reply #5 on: April 08, 2015, 08:36:09 AM »
Quote
Quote
This year I've contributed $3,550 to Roth IRA, so I need to put another $1,950 in.
If 3% = $216/mo, that makes annual salary = $86,400.  Subtract the $18K for the 401k and you are at $68,400.  Subtract any pre-tax insurance, FSA, etc. and you are...somewhere in the traditional IRA phase-out range, and in the 25% marginal bracket.  Depending on exactly where in the phase-out, it could be worthwhile to put what you can into a traditional IRA because you'll save 25% of that amount in taxes.

Annual salary is $93,329. I'm paid bi-weekly, so 2 months out of the year I get 3 paychecks (wasn't counting in the calculation since I budget for 2, and save the third). I also will have about $13k in taxable RSU grants. After 401k, FSA, personal exemption/standard deduction, I end up with about $76k. So just over the limit :/

Thank you for your help! I think that sounds like a good plan.