Some Thoughts on Debt Aversion and Employee Stock Purchase Plan

After several years of being debt-free (apart from the mortgage), we now have an auto loan. A rather huge one at that :( And it is driving us nuts. This is in spite of the fact that getting the auto loan is a well-thought out decision. Over the past year, we knew that our old car would die sometime soon and we needed to save to buy another car. And we did save quite diligently. But every time the cash reserve crossed $5K, we consciously made a choice to invest it, since in the long term a higher interest rate and the compounding of our savings account will yield far better fruits than the interest we have to pay for the car loan in the short term. The auto loan we have is at 5.25% and most of our investments (knock on wood) are doing better than that.

That said, a loan is a loan. And we hate it :(

So last week, I sold the stock I have purchased over the past year by participating in the employee stock purchase plan and applied it to the car loan. Here are some thoughts on the reasons for our decision and about debt aversion in general.

Most advice I have read, says not to own the stocks in the company you work for
In other words, don’t put all the eggs in one basket. If the company goes bust, you not only lose the job security but also a lot of your savings. Unless the company is doing very, very well and you know with a high level of certainty that you can make positive earnings on your stock, it is better not to put too much of your savings in the company stock. My company allows us to purchase stock worth 10% of the salary via the employee stock purchase plan and I have always participated to the maximum extent. That is a significant amount of money that I did not feel comfortable leaving in the company stock since the company has not been doing too well of late.

I got pretty good returns on my investment by selling when I did
The way they calculate the purchase price for the employee stock purchase plan is to take the lowest of the price on the starting date and the ending date of the purchase period and offer a discount of 15% on that price. The best way for me to take advantage of participating in the plan, since I don’t foresee a huge bump up in stock price any time soon, is to materialize the guaranteed 15% return. Also, fortunately for me, the day I sold the stock some industry news temporarily bumped up the price resulting in an overall return close to 25%!

Taxes suck :(
Even though the overall returns look good, we don’t really make that much since taxes take a huge bite out of it. If we had hung on to the stock for a year, it would have qualified for being taxed at the rate of capital gains. But because we sold early, it gets taxed as regular income. Boo.

Debt aversion can be a nasty thing
When we had the check for the money in hand, we had several options of what to do with it. We could reinvest it in diversified index funds or in real estate back in the home country that will most likely yield far better gains than the 5.25% we are paying for our auto loan. Or apply the amount to the emergency fund since we know for a fact that we will soon have some huge medical bills and there isn’t enough in our emergency fund to cover it. Or save it for travel expenses, since we plan on visiting our home country soon and the trip costs a lot! But the thought that is the foremost in our minds was the auto loan. So we decided to apply the whole check (with some additional amount that we added!) to bring the auto loan down by about 35%. I don’t know if it was the smartest thing to do, but boy it felt good to see the auto loan shrink :)

I just don’t understand why some people do not participate in the employee stock purchase plan!
Soon after the stocks for this period were granted, during lunch when we were all talking about it one of my colleagues revealed that he does not participate in the stock purchase plan! I was quite stunned. I am not very close to this person, and in my personal life, I tend to keep my mouth shut when it comes to other people’s finances, so I did not ask him why. But I can’t help but wonder. What motivates an otherwise perfectly smart person to make such a dumb decision? If the company allowed me to put more of my salary in the stock purchase plan, I would, even if it meant I would have to cut some corners due to a reduced take home salary. 15% of guaranteed returns (minus the taxes of course) is no joke. And still here was a perfectly sensible person saying no to that kind of returns. Why?

What do you do with the stock purchased through your employee stock purchase plan? If you don’t participate in the employee stock purchase plan in spite of you company offering one, will you please explain to me why not? And do any of you get so emotional about debt that you are willing to do anything to get rid of it? It can't just be us making some financially stupid choices! :)

*Image credit: Student Action Network