Prime Time Money

Here at Prime Time Money we’ve been focusing on how the mid-point in the year is a good time to revisit your financial situation and see where you stand.  To help get you started, I’ve put together a series of ideas to help you conduct your own mid-year financial check-up.  So far we’ve covered:

#1 - How is Your Spending?

#2 - Are You Saving Enough?

#3 - Got Bad Debt?

Last in the series is a review of the annual contribution limits on your retirement accounts.  There are several ways for you to save money pre-tax OR after-tax without tax on your earnings.  While I’m not going to get too specific on the different types of account, I will focus on the limits and how you can maximize.

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I recently started participation in my company’s Employee Stock Purchase Plan (ESPP). 

I think it’s an excellent idea, and hope to sell the stock as soon as it’s purchased at the end of the 6-month term (called “flipping” the ESPP). 

Then, I’ll use the ESPP stock funds to pay our property taxes, due early 2009.  It’s basically replaced my property tax savings fund.  Below, I present a bit more information on the ESPP, an example, and tips on making the most of your ESPP.

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In this article I’m going to share with you how saving money (putting your money into a savings account) is investing and how you can begin to act like an investor with your savings.

Saving Money Is Investing

I was visiting the MBN forums a few days ago and I ran across an interesting concept.  Some fellow bloggers were discussing saving vs. investing and how comfortable we each feel in sharing “advice” on both of those subjects on our blogs. 

I’m definitely more comfortable discussing the former (now here I am trying to do an investment piece). 

Then someone clever chimed in with ”saving money IS investing.”  When you save you are investing in the US dollar.  I guess that’s right.  Although you rarely think of it that way.  So, even if you only have a savings account and no true equity account (i.e. stocks, mutual funds) YOU ARE AN INVESTOR.

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You, Me, and ESPP

For a few weeks now my company has been touting their Employee Stock Purchase Plan (ESPP).  I’m new to the company and have never participated in one of these before, so I really didn’t know what to think.  I already have some company stock (via options) from when I was hired.  In my opinion owning those options has been enough.  You never want to own too much of one stock, right?  Definitely not your own company.  After all, being that I’m employed here, I’m already heavily invested in them.

15% Return?  I’ll take it.

Well, a co-worker (who knows I love talking saving money) started talking to me about this plan and told me she was going to do it.  She shared with me the basic concept.  You make automatic contributions (between 1% and 10%) every pay period to a fund, that after six months is used to purchase company shares of stock at a 15% discount.  You are then free to do whatever you want to with this stock.  If you sell it that same day (called ESPP “flipping”), you simply make the 15% discount.  Not bad for six months, right?  That’s an annualized return of 30% less taxes.  Nice.  I’m not going to be getting that anywhere else.  It’s actually more of a return if you look at it like this.

Can We Do This?

My thoughts quickly turned to my property tax self-escrow with ING DIRECT.  Why not use the ESPP in place of the ING DIRECT account (currently earning 3%)?  For the record, we have our emergency fund with ING DIRECT as well, so I wouldn’t be pulling ALL our money out of savings, just the property tax portion that I had set up in an extra account (contributing $350/mo.)

My next step was to do some actual, in-depth research on ESPPs and my company’s plan to be sure this was right move for Mrs. PT and I.  You didn’t think I’d just blindly sign-up based on a few co-worker’s suggestions did you?  I’ll share what I learned about ESPPs next week.

Other Thoughts on ESPPs

Here’s a very pro-ESPP post, ”the wonderful world of employee stocks” (@ Punny Money), which basically says at the 15% discount I’m getting, I’d be silly not to do it.

This article, “Cash in the Cubicle“ (@Market Watch) is also very positive in it’s overview of the ESPP.

A write-up (@Fairmark.com) called “Flipping ESPP Shares” discussed the ethics of doing ESPP flipping, which is what I’d be doing.  Do you think this would be an “abuse of the benefit”?  I really don’t.

Lastly, check out this read (@The Finance Buff) on employee stock purchase plans and how “ESPPs are a Fantastic Deal“.

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I went ahead and signed up for the ESPP today, as it’s the last day to sign up.  I’m pretty excited about this benefit and I’m super glad my company rolled it out.  Is anyone else using an ESPP to flip for a quick profit?

Pinyo at Moolanomy has a monthly feature where Larry Swedroe, his resident expert, answers readers questions on investing.  I sent a couple of questions Larry’s way and he provided some excellent answers:

PT: I have my entire 401K invested in a target-date fund (2040) through Schwab. What is your opinion on these types of mutual funds (including the fees)?

Larry: “There are several benefits of these funds; simplicity being among them. Also if they are well structured they are also well diversified, including international equities. And they automatically rebalance. I would recommend them only if they use passive funds like index funds and also have low costs like Vanguard’s funds. No reason to pay higher expenses.”  Read the rest of Larry’s answer…

PT: Considering US company stocks are only a small percentage of the world’s available stocks. Doesn’t that make you poorly diversified by following the 15-20% international stocks rule of thumb?

Larry: “First, the US is is not a small percentage of global equities. It is above 40%. Second, in my opinion that is a bad rule of thumb anyway. I believe investors should consider having 50 percent of their equities in international stocks and have at least 30 percent.”  Read the rest of Larry’s answer…