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wanna know how i was able to give myself a raise watch this video to find out [Music] welcome back to finance with arjun everyone hope you're all enjoying the holidays and getting to indulge in some good food i myself just had some leftover pecan pie and boy am i feeling satisfied but i digress in today's video we're talking about how i was able to make thousands of dollars in addition to my salary using the employee stock purchase program by the way this is not clickbait at all and if you watch the video all the way through you'll understand exactly why all right let's start with the basics what exactly is the employee stock purchase plan an espp is a benefit offered by companies that allows their employees to buy company stock at a discount through deductions from their paycheck this discount is usually between 5 and 15 the way it works is that once you enroll you choose a percentage of your salary to go towards the espp your company then starts taking contributions from every paycheck until the end of the current purchase period it's at this point that the company buys discounted stock for you there's usually a limit on how much you can contribute for example up to 10 percent of your paycheck and the overall contribution amount should not exceed 25 000 per year some companies will also be like nope we want to make this even better for you and offer what's called a look back period this basically gives you the option to buy company stock on the first day of the offering period or the last based on whichever is lower let me walk you through an example so you know exactly why this is so great for the sake of privacy i'm not gonna be using my own numbers but i'll just pick some numbers that are easy to do division with so let's say that person x makes ninety thousand dollars a year or seven thousand five hundred dollars a month and decides to contribute ten percent of his salary to the espp this espp has a six-month purchase period with the look-back provision i spoke about earlier and gives a 15 discount a 10 contribution would mean 750 dollars per month goes towards this plan for a total of four thousand five hundred dollars in six months this is when the company purchases discounted stock how does that discount work let's say the company stock closed at 100 on the first day of the offering period and also closed at 110 on the last day of this period you would then take the lower of the two prices in this case a hundred dollars and purchase stock with a 15 discount which here would come out to be 85 this would mean that you own 52.94 shares if you sell immediately at the current price of a hundred and ten dollars you get back five thousand eight hundred and twenty three dollars remember we had initially contributed only four thousand five hundred dollars but we got back five thousand eight hundred dollars which is a difference of thirteen hundred and twenty three dollars in free money or essentially a twenty nine point four percent return on investment this is basically equivalent to getting a raise of two thousand six hundred dollars over the course of the year pretty awesome right by the way if you're liking this video so far please consider hitting the thumbs up button it really helps the channel out tremendously also consider subscribing and turning the bell notifications on so that you don't miss out on any of my future videos all right back to the example you might be saying to me well arjun here the price went up obviously you're gonna make money but what happens when the stock price goes down let's walk through that case let's start at hundred dollars again for the first day closing price but this time the last day closing price is at ninety dollars with the discount you'd purchase shares for 76.50 per share and you'd end up owning 58.82 shares which is worth 5293 if you sell immediately compared with the four thousand five hundred dollar initial contribution we still made 793 dollars for a return on investment of 17.6 think about that even with the stock price going down the lowest possible return through the espp is 17.6 that's like getting a 1600 raise over the course of the year in the worst case scenario the true rate of return when you account for the fact that this is just over a six month period and that your money was not 100 invested during the entire time is actually much much greater that's out of scope for this video but i'll leave a link in the description box in case you're interested in learning more about it when speaking to some friends and colleagues i realized that not too many people take advantage of this benefit or even understand it fully for that matter of fact everyone is just concerned with their 401ks and their hsas and other things like that so the espp is a secret hidden gem in that regard lucky for you i'm here to expose the secret and get you the free money that you deserve unless you have a 401k match you're not taking advantage of or have debt with a crazy high interest rate of 20 or greater it would behoove you behoove all right that was not in the script but let's run with it it would behoove you to look at your company's espp obviously you'll have to give a portion of the gains away to taxes but it's still a no-brainer to max it out in my opinion talking about taxes let's dive into that a little bit more if the shares are sold immediately you get taxed at ordinary income tax rates however if you hold your shares for more than a year since your purchase date and more than two years from your offering date you get taxed at a lower tax rate which is the capital gains rate of 15 to 20 percent but should you hold on to these stocks for longer just for the lower tax rate absolutely not holding on to these stocks for an extended period of time just to save a small amount on taxes usually a couple of hundred dollars max is just not worth the risk if your employer's stock goes down during this time you're putting your entire investment at stake moreover like i said in my rsu video you never want to hold on to too much of your own company stock because you're already reliant on them for other things like your salary if you're too heavily indexed on your company stock and something goes wrong the stock price goes down you could lose your job and your whole world just comes crumbling down so the best option would be to sell these espp stocks immediately pay ordinary income tax on the sale and just diversify into index funds or something there's literally zero risk when you employ this method and you're guaranteed to make money without losing any of it i think warren buffett would agree with me on this one his two rules are pretty self-explanatory one of the biggest arguments against the espp is that the payroll deductions result in a smaller take-home pay this can be difficult for people especially those living on tight budgets with extremely little leeway while there is an element of truth to this concern i think it's important to know that the espp becomes self-funding after the first period once you get back the amount from selling your stock the first time you can put some of that money aside in a savings account to live off of and then continue to contribute to next periods espp through payroll deductions so if you're able to hunker down and make it through that first period of reduced pay you probably won't have to worry about it for future months participating in the espp also makes taxes slightly more complicated but that's a smaller concern according to me alright so what do you do with all of this information on this channel i like to provide actionable steps so it doesn't feel like i'm just talking and you all are listening but actually something tangible comes out of all of this so if what i said so far makes sense to you here is what i recommend doing step by step step one dust off that benefits guidebook that your employer gave you and check to see if they offer an espp program most companies in my experience at least do offer them but it doesn't hurt to check step 2 read the details of your espp and determine whether it's a good plan or not and when i say good plan it means one that does not have a minimum holding period and also offers a decent discount on the company's stock price ideally ten percent are greater for the most upside step three if the espp satisfies these requirements enroll in the program there are only certain times during the year that you can do this and you'll have to sign up through a brokerage service so that the buying and selling can happen seamlessly step 4 max out your espp contributions to take full advantage of this awesome perk this is when your company will begin taking money from your paycheck and automatically buy discounted company stock for you and the final step step five as soon as they vest and these stocks become available to you sell them immediately keep some money aside for taxes and then either save or invest the rest that's it you just made some risk-free money hopefully by watching this video you've understood just how valuable a perk the espp actually is let me know in the comment section down below if your employer offers this perk and how much you contribute to it if i convinced you to start contributing or increase your existing contribution let me know that too that brings me to the end of yet another video have an amazing rest of your day and i'll catch you next time