Sell company stocks to pay off debts, or keep to build momentum?

[babysnowbyrd]

I'm not ready to make a decision yet, but here's what I'm looking at in a few years:

My company (oilfield services) has a discounted stock purchase plan (DSPP). Each paycheck I have 1% of my pay going towards it (10% max). Stocks are purchased at the end of six months. They are discounted 7.5% from the price of stock on opening day OR closing day, whichever is lower. I believe dividends go towards more stock purchases (not 100% sure how that works).

I'm working on paying of debts now (interest rates higher than 7.5%), so I'm only putting in 1% of my pay just to keep myself in it and to avoid having to re-enroll later. Once more of my debts are paid off, I'll up to it to 10%

But here's the real question:

Once I get to the point where I can afford to have 10% of my pay go towards shares, which would be better in the LONG RUN:

a) Immediately sell stocks for 7.5% profit and apply to current debts, or

b) Keep paying the debts as usual, keep the money in the stocks for more growth long-term.

c) A combo? Like sell stock to apply to debts with interest higher than 7.5% but leave smaller interest debts according to current payment plan?

[Spondulix]

Could we get some more specific numbers? I think it depends on how much debt you're talking about vs how much stock you're purchasing.

[MDM]

My company (oilfield services) has a discounted stock purchase plan (DSPP). Each paycheck I have 1% of my pay going towards it (10% max). Stocks are purchased at the end of six months. They are discounted 7.5% from the price of stock on opening day OR closing day, whichever is lower. I believe dividends go towards more stock purchases (not 100% sure how that works).

I'm working on paying of debts now (interest rates higher than 7.5%), so I'm only putting in 1% of my pay just to keep myself in it and to avoid having to re-enroll later. Once more of my debts are paid off, I'll up to it to 10%

But here's the real question:

Once I get to the point where I can afford to have 10% of my pay go towards shares, which would be better in the LONG RUN:

a) Immediately sell stocks for 7.5% profit and apply to current debts, or

b) Keep paying the debts as usual, keep the money in the stocks for more growth long-term.

c) A combo? Like sell stock to apply to debts with interest higher than 7.5% but leave smaller interest debts according to current payment plan?

The more you can put into the DSPP the better.  It seems you understand this on a theoretical level...but it's not clear whether you are doing "whatever it takes" to put that 10% of your pay in this direction.  Suggest you consider "what would it take?" to do 10%.

Anyway, from a statistical risk perspective, option "a" is best.  The risk here (think Enron...) is that your company folds, causing a simultaneous loss of income and investments.

[Richard3]

A minimum of 7.5% return in 6 months is more like a 15% interest rate (slightly more because you get to do it twice in a year). If the stock goes up over that period, you're clearing more.

If I were you, unless I suspected the company was going broke, I'd be putting the maximum into the plan even at the cost of leaving debt (<15% interest rate) at minimum payments. Hell, I'd probably borrow money at up to abut 10% to do it, but I am comfortable with risk. I mean this is almost too good to be true (although the one concern I'd have is company going broke since oilfields aren't exactly a great industry right now, but if you're only going to lose 10% of 6 months pay, that's not too bad.

Whatever it takes to get to 10%? You telling me if you posted your monthly expenses here, nobody would find something to punch you in the face over? You have no cable, a pre-pay phone, ride your bike everywhere, never eat out, buy only real food you have to cook, don't ue the AC / heating, etc, etc? Right now you're leaving free money on the table (even aside from your debt is a hair on fire emergency, especially if it's over 7.5%

[babysnowbyrd]

My expenses are in more detail in my first post in my journal. http://forum.mrmoneymustache.com/journals/the-baby-snow-bird/. I only feel like I've received one real face-punch so far besides some other helpful suggestions. I do live pretty frugally. However, with my debt payments, I'm only able to really make things work with the overtime I earn. My base pay isn't really enough to cover everything. I was initially at 10% but it made for some scary moments right before payday because 10% was a pretty good chunk. I didn't start with OT, so I actually worked 2 jobs (paper route, cashier at mall) besides my day job. My main plan is to pay down some debts so my DTI ration is down lower and there's more breathing room.

However, if I'm losing out on more money to pay down debts faster, I can see what I can swing. My face-punch was over being a pansy with the thermostat, so I've already reduced my at-home top temp 5 degrees. Still, I think that will only make a few dollars difference at a time. My utilities are very low in the summer time (don't use AC unless there's company).

Other things I can think of:

I'm increasing the allowances I'm claiming on my taxes. That should free up a little extra money.

Paying of CCs (hopefully by March 2015) will reduce my DTI quite a bit, so I can use what I used to pay for min payments to be purchasing stock instead

In the summer my utilites go down quite a bit, so that will account for breathing room. Plus the ability to bike to work a lot more. (I'm not prepped to do sub-zero biking in snow at the moment, but I think I could maybe ease into it after biking full-time in the summer)

[babysnowbyrd]

Could we get some more specific numbers? I think it depends on how much debt you're talking about vs how much stock you're purchasing.

How so? Is there a general formula to know when it's worth it and when it isn't?

Plus, I just found this at the company website:

A disqualifying disposition of shares purchased through the discount stock purchase plan ("DSPP") occurs if you dispose of such shares before meeting the following holding period:
 ■More than a year after the purchase of the shares and,
■More than two years after the beginning of the offering period.

If you have a disqualifying disposition of shares acquired through the DSPP you will have compensation income. If your disposition of these shares was due to the sale of the stock, you will also need to report capital gain or loss from the transaction.
 
The compensation income from a disqualifying disposition of DSPP stock will be reported in Box 1 of Form W-2. If you sold the shares (instead of making another kind of disposition, such as a gift), you should also receive a Form 1099-B from the broker, which reports your proceeds from the sale.
 
Your compensation income from a disqualifying disposition of DSPP shares is the fair market value of the shares on the date of purchase minus the amount that you paid for them.
 
Example - if you paid $2,200 to acquire shares that had a fair market value of $3,000 on the date of purchase, your compensation income from a disqualifying disposition is $800. This amount will be reported in Box 1 of your W-2.

I think this may/may not be a game-changer? Depending on taxes maybe?

I was thinking it might be a little more clear-cut on which is a better choice but maybe not...

[MDM]

I think this may/may not be a game-changer? Depending on taxes maybe?

I was thinking it might be a little more clear-cut on which is a better choice but maybe not...

If your employer offered you a 3% (3% = 10% * 30%) raise, would you take it or decline it?

[wtjbatman]

I know we are conditioned to have an aversion to paying taxes, but in cases like this it works against people. As MDM pointed out, you are still coming out (well) ahead, even after those pesky taxes are paid. There are very few reasons to not do it.

[Spondulix]

Could we get some more specific numbers? I think it depends on how much debt you're talking about vs how much stock you're purchasing.

How so? Is there a general formula to know when it's worth it and when it isn't?

If you look for online calculators "should I invest or pay off debt?" or "should I pay off mortgage or invest," it's similar calculations, but not quite exact. What you're looking for is what your net worth will be after a fixed amount of time (say, 10 years).

Then, you calculate what your net worth would be in different scenarios. The way I did it was with 3 scenarios:
1. Put all my extra money towards debt and none towards investment
2. All towards investment (conservative return) and minimum on debt
3. Somewhere in the middle

Finding that sweet spot - where you'll come out ahead the most - I haven't figured out an easy way to calculate that, unfortunately. Plus, investment earnings are variable. But, you can get a rough idea if there is even a benefit. In my case, 10 years out, there was only like $2k between the three options. So, unless the stock market looks to do over 10% for the next 10 years (which I don't think it will for a while), it really doesn't matter where I put it.

Since earnings on investments are unpredictable, you probably could do these calculations another way around, too. If you know that you will pay off your loan in xx years, what interest rate would you have to earn on investments to have the same net worth (in that same time period)? If it looks to be completely unrealistic to earn what you calculated (like 30% return), then you know that paying down the loan will probably benefit you more in the long run.

Does that make sense? (I'm hoping someone has a great spreadsheet or website to explain what I'm talking about...)

[Richard3]

I know we are conditioned to have an aversion to paying taxes, but in cases like this it works against people. As MDM pointed out, you are still coming out (well) ahead, even after those pesky taxes are paid. There are very few reasons to not do it.

Yeah, I wish I paid a million dollars of income tax a year. That would be awesome (because duhhhh, it would mean I made at least a couple million bucks in a year).

[babysnowbyrd]

I know we are conditioned to have an aversion to paying taxes, but in cases like this it works against people. As MDM pointed out, you are still coming out (well) ahead, even after those pesky taxes are paid. There are very few reasons to not do it.

Sorry! This turned out to be a little harder to understand then I thought. So just to be clear, I feel that the overwhelming consensus is to sacrifice whatever necessary to up my contribution to the DSPP to 10%. Then do some more detailed calculations to decide on one of the following options:

1. Immediately sell stock at a profit, pay the income and capital gains taxes on that profit and apply the rest to debts.

2. Wait two years after each purchase period and only sell qualified stock and pay only capital gains taxes. Apply the rest to debt.

3. Pay debts off as currently scheduled and leave the money in the stocks alone to grow.

These are my personal considerations and answers to some of your questions:

1. I'm worried about my ability to pay my bills if I go to 10%. I currently can't afford them without part-time jobs like I did for most of the year or with over time as I am now.

2. I'll find out for sure in a month, but I'm fairly certain I had way too much withheld for taxes this year. I recently resubmitted a W-4 with more allowances. This would free up more money to go to the DSPP. At least a few more percent.

3. The company I work for is very large. I believe it's been around since the 1840s? Of course that doesn't make it any less vulnerable to a catastrophe. I think it's more likely to do well than not. It's large enough to weather storms. I'm quite aware that no individual stock is "safe" but I think the risk here is low.

4. As for job security, my specific division in the company is usually one of the last to be shut down if at all. We're not involved with new drilling or exploration. With current prices falling, those are usually the first areas to take cuts. Clients still want to keep current wells running if they're still profitable so that's where we come in. Our biggest client is still forging ahead and there's still overtime to be had.

5. Of course as an individual, I'm always aware that I can lose my job at any time regardless of the market! However, I'm quite useful at the moment, not in the least because I'm all to happy to put in hours to stay late while others can go home. I would have to misbehave quite a bit to make it worth it with it to hire someone new and start training from scratch. There's a lot to learn, and if they were lucky enough to find someone with experience, they would probably need them more urgently in another position.

[babysnowbyrd]

Could we get some more specific numbers? I think it depends on how much debt you're talking about vs how much stock you're purchasing.

Ok, I pasted this from my debt snowball spreadsheet:


Creditor    Balance            Rate      Payment
CC1          1,289.00         12.00%         50.00
Car            1,858.00           3.74%       100.00
CC2          3,395.00          10.00%        85.00
SL 1       11,067.00             3.40%      106.00
SL 2         7,499.00             6.80%        95.00
SL 3         1,935.00             2.35%        16.66
SL 4         3,281.00             2.35%        28.24
SL 5         3,592.00             6.80%        47.81
RV          15,563.00            7.90%      320.00

So my CCs are my highest interest debts, with my RV next then some student loans. Based on simple math, I should perhaps use the stock to pay on the CCs.

I'm not sure right now, but I think I probably only have between $750-$1000 towards stock since I just started with the company.  So the compensation income tax and the capital gains taxes would be very small. It should be available to sell within the next few days.

I'm thinking I'll go ahead and sell what I've got to apply to the CCs. If I do that, I think they'll be mostly (or all) paid off within six months for the next period in which I'll have stock.