First Home, 401(k) or ESPP? Which Takes Priority for Savings?

It’s a classic competition for funds. Caleb*, 25, has launched his career as marketing support manager for an alternative energy company. After working his way through community college and state university, he is now earning $80,000 a year. He understands the value of hard work and saving. The first in his family to graduate from college – not without college loans -- he is ambitious and driven to succeed in his work and personal life.

No one said it would be easy and he doesn’t like owing thousands of dollars in college debt. But it’s all beginning to fall into place. In addition to following a $350-per-month student loan repayment schedule, Caleb has earmarked $600 per month more for savings. He’d like to buy a home in a few years.

He recognizes the importance of starting to save early, especially for a long-term goal like retirement. At the Big Brothers/Big Sisters Meeting the other day, the other volunteers were touting the Roth/401(k). He wonders when he should start thinking about investing in the 401(k) and where retirement should fall in his financial priorities.

Tuesday’s email brought a new series of questions: “Congratulations. You are eligible to participate in the company’s Employee Stock Purchase Program.”  Now he’s really confused. If he signs up to defer some of his $600 per month in the Employee Stock Purchase Program, the company will match amounts in stock of 15% of his contribution (priced off the lower of the stock prices at the beginning or end of the offering period). Of course, the company’s portion (also called a discount) is taxable income but, as long as he holds the shares for two years from the offering date or one year from the purchase date, the appreciation is taxed as a capital gains. How can he pass up what amounts to a 15% match?

Caleb always thought you needed a big portfolio to get financial planning advice, until one of his friends went to SFG for a financial plan called the Navigate Service. This is designed for younger employees who need planning help to accumulate wealth. They are able to integrate stock-based compensation in the plan and offer deep knowledge on how the ESPP operates.

Caleb was able to clarify his goals and signed up for the annual Navigate service, so he can track toward his short-term, intermediate and long-term goals. He feels good about setting his priorities and getting back to work and volunteering with Big Brothers.

*The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

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