ESPP as emergency fund

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APX32
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ESPP as emergency fund

Post by APX32 » Mon Sep 03, 2018 4:42 pm

I started my new job last month and will begin participating in the ESPP program starting with the 4th quarter (October-December) period.

I'm all aware of ESPP specifics, we had a similar program in a previous job and I participated there as well for almost 7 years, and always sold as soon as the shares showed up, pocketing the 10% profits. Taking into account all the risk factors and the customary Enron reference, I'd like to proceed a little differently this time.

I'm thinking about keeping most of the shares as part of my emergency fund. By my calculations, I'll end up with $30-35k each year, and this would amount to <5% of my overall net worth. I already have close to $100k cash as an emergency savings right now, so as these ESPP shares start to add up, I may start selling chunks each year to rebalance as needed.

I see the risks as minimal, and there's a definite upside of additional stock price appreciation. There's also a nice dividend I get to collect. While past performance is no guarantee of future returns, a quick calculation based on the stock price over the past 10 years shows you would have nearly tripled your money by holding on to those shares.

Have I overlooked anything? I believe this will also simplify my taxes.

PFInterest
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Re: ESPP as emergency fund

Post by PFInterest » Mon Sep 03, 2018 5:11 pm

you have an efund.....why dont you distribute some of that cash instead.

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oldcomputerguy
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Re: ESPP as emergency fund

Post by oldcomputerguy » Mon Sep 03, 2018 5:16 pm

As I understand it, the reason to have an emergency fund in the first place is so that you wom’t have to sell stocks during a decline to meet an unexpected expense. Putting your emergency fund in stocks seems to me to be defeating the purpose.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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grabiner
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Re: ESPP as emergency fund

Post by grabiner » Mon Sep 03, 2018 6:46 pm

If your employer gets into trouble, you could lose your job and your stock portfolio at the same time. Therefore, it doesn't make sense to use employer stock as an emergency fund.
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Dottie57
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Re: ESPP as emergency fund

Post by Dottie57 » Mon Sep 03, 2018 7:16 pm

oldcomputerguy wrote:
Mon Sep 03, 2018 5:16 pm
As I understand it, the reason to have an emergency fund in the first place is so that you wom’t have to sell stocks during a decline to meet an unexpected expense. Putting your emergency fund in stocks seems to me to be defeating the purpose.
+1

APX32
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Re: ESPP as emergency fund

Post by APX32 » Mon Sep 03, 2018 9:49 pm

I think during the first 12 months, which will be 4 purchasing periods, I will let the stock accumulate, and then decide how to proceed going forward. As I mentioned initially, the amount will be a small percentage of my overall investments, so the risk is minimal. It's not as though I'm betting the farm on the company stock, I have a solid base which is approaching $750k, which is invested in a couple of index funds, PrimeCap Odyssey Stock Fund and Fidelity Low Priced Stock Fund. This is merely taking advantage of ESPP and betting on the company stock over the course of the next year.

ThePrince
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Re: ESPP as emergency fund

Post by ThePrince » Mon Sep 03, 2018 9:56 pm

APX32 wrote:
Mon Sep 03, 2018 9:49 pm
I think during the first 12 months, which will be 4 purchasing periods, I will let the stock accumulate, and then decide how to proceed going forward. As I mentioned initially, the amount will be a small percentage of my overall investments, so the risk is minimal. It's not as though I'm betting the farm on the company stock, I have a solid base which is approaching $750k, which is invested in a couple of index funds, PrimeCap Odyssey Stock Fund and Fidelity Low Priced Stock Fund. This is merely taking advantage of ESPP and betting on the company stock over the course of the next year.
You are rationalizing your behavior/decision. You created the post in re. an emergency fund; now, it’s about “merely taking advantage of ESPP...”

ryman554
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Re: ESPP as emergency fund

Post by ryman554 » Tue Sep 04, 2018 8:13 am

APX32 wrote:
Mon Sep 03, 2018 4:42 pm
I'm thinking about keeping most of the shares as part of my emergency fund. By my calculations, I'll end up with $30-35k each year, and this would amount to <5% of my overall net worth. I already have close to $100k cash as an emergency savings right now, so as these ESPP shares start to add up, I may start selling chunks each year to rebalance as needed.
That is not an emergency fund. That is a single-company investment fund. Do you invest in single companies? Then, OK, but call it what it is.
I see the risks as minimal, and there's a definite upside of additional stock price appreciation. There's also a nice dividend I get to collect. While past performance is no guarantee of future returns, a quick calculation based on the stock price over the past 10 years shows you would have nearly tripled your money by holding on to those shares.
The same could have been said for INTC or AMD early 2000's, but look at them since. Or GE today. Or Sears. Or Enron or MCI. Or even -- wait for it -- BRK. Why BRK? Because the outsized gains happened long long ago. Today, I suspect it's just keeping up with the Jones' with a single (dual?) point of failure in Buffet and Munger.

You are letting past performance dictate your future returns.
Have I overlooked anything? I believe this will also simplify my taxes.
Actually, it makes your taxes a lot more complex since you move from a disqualifying distribution to a qualifying distribution assuming you hold for 2 years from grant date. There are more things than discount at purchase date to keep track of when you sell, and your brokerage/W-2 form isn't going to do it for you.

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