Welcome to the 15th edition of the Tech Financial Planning (TFP) newsletter.
In this week’s issue, I want to share my 2 favorite ways for tech professionals to get “free” money from their company.
No, this isn’t anything crazy, sketchy, or illegal.
In this newsletter, we’ll break down 401k matching and ESPP programs, and why these can be two of the biggest no-brainers for tech professionals.
TL;DR
With a 401k match, your company adds a certain amount to your 401(k) account in addition to what you contribute.
Most ESPP programs come with a discount and a lookback, which equates to good chunk of free money
Not taking advantage of a 401k match and an ESPP program is the same as leaving free money on the table.
Free Money #1: Your Company 401k Match
When your company “matches” your contributions, they will add money to your 401k on top of what you put in.
It will typically either be a percentage or a dollar amount
“Not taking advantage of an employer match is the equivalent of leaving free money on the table.”
Examples
Okta: Okta matches your contributions dollar for dollar up to $208.34 per paycheck (up to $5,000 per year).
AKA if you put in $5,000, OKTA also puts in $5,000.
NVIDIA - NVIDIA will match your contributions up to this year’s annual limit of $9,000.-
We'll match dollar-for-dollar every pay period, up to $6,000. Then we'll match fifty cents for each dollar for the next $6,000.
AKA if you put in $12,000, NVIDIA will put in $9,000.
Google - matches the greater of 100% of the employee's contribution up to $3,000, or 50% of their contribution up to a maximum of $9,500 per year.
AKA if you put in 19,000, Google will put in $9,500
Netflix - 100% match on up to 4% of base salary
AKA if your salary is $200,000 and you put in 4%, you would put in $8,000, Netflix would also put in $8,000.
Free Money #2: Employee Stock Purchase Plan
An ESPP is a company run program that allows employees (if they want) to purchase company stock, usually at a discount.
You contribute to the plan through payroll deductions (similar to your 401k).
This “bucket of money” builds up between the offering date (beginning of the period) and the purchase date (end of the period).
At the purchase date, the company uses the employee’s accumulated funds to purchase company stock on behalf of the employee.
Two key features:
Discount: You are able to buy your company stock “on sale,” typically 5%-15% off.
Lookback: You get to purchase your company stock at the better price between the 1st day of the period and the last day (aka if the beginning is better, you get to look back and choose that).
Because “lookbacks” can be confusing, here’ an example.
The beginning of the offering period (offering date) is January 1.
On that day, your company stock is $10.
The end of the period (the purchase date) is June 30.
On that day, your company stock is $15.
With the lookback, you get the lower of the two periods.
In this case, you would get to buy (hopefully at a discount) at the $10 price on January 1, even though the stock is currently trading at $15.
And if it was the other way around?
On January 1 it was $15 and on June 30 it was $10?
You would get to buy based on the $10 price.
When to avoid an ESPP
This one is simple.
It doesn’t make sense to participate if there’s no discount and no lookback.
There’s 0 financial incentive to participate in the program.
At that point, you could buy your company stock on the open market just as easily.
If either one exists (particularly the discount), then it might make sense to contribute.
Examples
Nvidia - Crazy lookback period
Your offering price for NVIDIA ESPP gets set the first trading day after the month you’ve enrolled, and it remains the look-back price for up to 24 months.
During these two years, there will be four purchase periods. Your contributions over each period will purchase our shares at a 15 percent discount.
The discount will be applied to the lower of either the price of NVIDIA stock set at the beginning of your offering period or its price at the end of the purchase period
Okta - Buy shares of Okta stock twice a year and get at least a 15% discount on your shares. Eligible employees have two opportunities each year to participate: June and December.
Combining Your 401k match with your ESPP - An Example
Enter Sam.
Salary of $250,000 a year.
His company offers a 100% match on 401k contribution, up to 4%.
They offer a “typical” ESPP program with a 15% discount and 6 month lookback.
Sam decides to make the most of both.
He chooses to put in at least 4% to his 401k and the maximum contribution to his ESPP
How much free money does he get?
From his 401k, Sam would get $10,000.
If he contributes at least 4% (to get the full match), he would put in at least $10,000.
($250,000 x 4% = $10,000)
His company would match that $10,000.
From his ESPP, Sam would get a minimum of $3,750 (could be higher based on the lookback).
The IRS maximum contribution limit is $25,000, which he gets for 15% off.
Sam puts in $21,250 into his program and get $3,750 in “free money”
$25,000 x 15% = $3,750
Putting both the ESPP and the 401k together, Sam would get $13,750 in free money this year.
Hot damn!
Putting It All Together
Working in tech has some great potential benefits.
Particularly “free money” from your company.
These programs can jumpstart your savings and investing.
If you have the cash, in most cases you’d be silly to not participate.
Thousands of dollars from your company for free?
Sign me up.
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