Savings Vehicles

[MelodysMustache]

I have thee different savings vehicles through work, and I am not sure how best to divide them up.  I have a traditional or Roth 401k, an after tax 401k that can be converted to Roth within the plan, and I have an ESPP.  The ESPP is for company stock that is good but not great, currently rated as a '“buy” by analysts and I get a 10% discount.  I currently have  10k set aside in an emergency fund and would like to have about 30k easily accessible in the event of an emergency such as unemployment.  I save for irregular expenses such as auto or home repair separately.  My income is too high to utilize a Roth IRA.  I can put 15% of my pay to ESPP and up to 20k annually into the after tax 401k that I would then convert to Roth.

I will max out the traditional 401k to 17.5, and I can save another 10-15% of my gross pay beyond that.  I am leaning towards using the ESPP to get my EF where I would like it to be then use the after tax 401k.  Alternately I  can evenly divide between the ESPP and 401. 

Can I get some different opinions on this?

[Dr. A]

I have 2 opinions on ESPP plans:

1) Using an ESPP to buy discounted shares is by far the best risk-free return in the world. If you have a 6-month contribution cycle, you get an instant 10% gain on money that (on average) you had invested for 3 months*... instant 40% rate of return.

2) You should never, ever own shares of your own company, because you are already invested in it to the tune of your entire salary. If your company gets into trouble (say, accounting irregularities, etc.) your job may be in jeopardy at the very moment your investment goes "poof".

I reconcile these by diverting the maximum into my company's ESPP, and then selling the shares within minutes of them being deposited in my broker account. You have to check the details of your plan though. Mine comes with no holding restrictions, but many require minimum holding periods. Being short the stock in a separate account is another option, but this can be expensive over time and some companies have policies against employees being short the company's shares.

*Your first contribution is in there for about 6 months, the last one for about one week.