Company Share Matching Plan, Should I do it?

Definitely, it is free money. You would be stupid to turn down free money.

Sales Dude wrote:

So I just got an offer to participate in a share matching plan at my company. For every three shares I purchase, my company will match one share. The price offered per share is around $53. There is a three year vesting period to receive the matched shares.

I work for a very large company. 52 week high for this stock is $160 a share, now it is down to $53.

I am only 24 years old, and I plan on staying with this company for at least a few years. Should I do this? How many shares should I buy?

I would do it ONLY if the following is already in place:

1) 3 month emergency fund (could pay your expenses for 3 months). Liquid account (savings or Money Market Account).

2) You have NO debts other than a house payment.

3) 15% going toward retirement accounts (401k and Roth IRA preferably).

If you have done the three steps above, then sure go ahead an dabble in some company stock if you want. It is a VERY bad idea to have money that you can't afford to lose tied up in stock of the company you work for. If your company goes under then you lose your job AND serious money tied up in their stock -- double edged sword.

If you have student loan debt, credit card debt, car loan debt, then you should not be investing yet at all, and ESPECIALLY not doing the company stock thing. Not sure if you have any of that debt, but it is common for a 24-year-old to still have student loan debt and likely some other debt. Best to get that all cleared up as soon as possible. Become debt free no later than age 30 (and earlier if possible) and then do 15% or more toward retirement accounts. ONLY do the more risky investing you are given the option to do once those other steps are in place.

NO NO NO NO NO ......Wamu, Enron, etc, etc, etc

Flagpole, thanks for the response.

1. I have an online savings account (3% + APR) with 5 months worth of paychecks, this is growing as I am saving for a house.

2. The only debt I have is my federal student loan. $7000 left. I am only slightly ahead of the minimum payments. Interest rate is pretty low this year (4% or so, but it fluctuates year to year based on some rate set in July each year).

3. I contribute only 6% toward a traditional 401k, plus 4% company match. This is the minimum contribution to get the max company match.

It sounds like I should go for a Roth IRA before the company stock. Do you recommend a vendor for this?

Flagpole - you could help me win an argument with my heinous father in law.

Basically a few years ago myself and my wife were making good money but spent the first few years of our professional careers paying off credit cards/loans etc that had built up in college. Given how crazy we had both been in college paying these loans off meant even though we were working cash was tight as all extra money went towards loans.

Between us we paid off over $40k in debt in the space of 3 years.

And only then (now) did we start investing in our Company 401k - which is generously matched up to 8%.

I hadnt really thought much about this - i just wanted to be debt free.

But Mr Know-It-All father in law continues to moan/complain/put down that if your Company has a 401k plan you are absolutely stupid not too invest in it. I see where he is coming from in that you should always invest if a Company is matching - but I think the interest we would have been paying on debt was far more punitive than what we could have hoped to earn.

Anyway - I know what I did was right - but can you give me two or three argument clinchers for the Christmas trip home so I can make him shut up once and for all?

On a side note - this is a 50 year old guy whose 401k is prob only worth about $150k and he jsut had his FA put $50k in to GE last week cause he thought they'd hit the bottom. Maybe they had but I'm sure his FA had got sick of telling him that a diversified portfolio was the way to go.

I had about 50k in the Wamu employee matching stock fund. Lost it all.

i had a significant amount invested in my company's stock back in the tech boom - pop - it was all gone.

you should not look at it as "free money" especially now. your investment in your existing company is your job - do not put all of your eggs in one basket. typically when the stock takes a big hit, your continued employment is also at risk. it REALLY sucks when the company's stock price takes a hit AND your job takes a hit at the same time.

this is also a ploy that companies use to pump up or support the stock price. tell them that you want the same kind of deal in terms of options as the executives. most of them are granted options at very low prices - so, you will not see them putting their money into "employee stock purchase plans".

Sales Dude wrote:

Flagpole, thanks for the response.

1. I have an online savings account (3% + APR) with 5 months worth of paychecks, this is growing as I am saving for a house.

2. The only debt I have is my federal student loan. $7000 left. I am only slightly ahead of the minimum payments. Interest rate is pretty low this year (4% or so, but it fluctuates year to year based on some rate set in July each year).

3. I contribute only 6% toward a traditional 401k, plus 4% company match. This is the minimum contribution to get the max company match.

It sounds like I should go for a Roth IRA before the company stock. Do you recommend a vendor for this?

Dude, you are in a very nice spot. I'm not too worried about that student loan as $7,000 isn't THAT much money, and 4% is a decent rate; even so, it would be great to not have to make that monthly payment -- if you can get it gone completely by the time you are 28 (or even earlier) then that would be a very good idea; only take that long IF you are continuing to contribute to your 401k (which you should because that's a decent company match) -- 6% with the 4% company match is nice, especially beginning at age 24, but ultimately you'll want to do more.

If I were you, I would continue to do what you're doing with the 401k, ramp those student loan payments up so that they are gone by your 28th birthday, and contribute a little to a Roth IRA if you can. If you were already in a house or decided never to have a house, I would advise that you do 9% into a Roth IRA so that you are contributing 15% of your own income into retirement, but since you are saving for a down payment on a house, continue to put some energies there.

By the time you are 28, let's say you have that student loan payment gone, have no other debt, and you have 15-20% down for a house (credit markets should be more loose in 3.5-4 years). Assuming you use the rule of thumb to get a mortgage that is no more than 25% of your TAKE HOME pay, then you should be able to do 15% into retirement accounts. Not sure what you make, but let's do a little math.

I'll assume you have $5,000 invested for retirement right now. If you continue to get 10% until you are 28 (6% from you, 4% from your company) based on a $40,000 salary, and then at age 28 you up your contribution to 15% with a new salary of $50,000 (plus the 4% from your company for a total of 19%) then based on just 8% annual return, you will reach the following milestones:

age 60 - $1.62 million ($64,800 annually if you take 4%)

age 62 - $1.91 million ($76,400 annually if you take 4%)

age 65 - $2.44 million ($97,600 annually if you take 4%)

age 67 - $2.87 million ($114,800 annually if you take 4%)

In my figuring, from age 28 on, I gave you NO raises, so in every scenario above, you will be making MORE money per year than you were while working. Since you will likely get raises, as long as you base your contribution on percentage of income, then you will have MORE than I have above. Either put in a bigger percentage, OR more money early on, OR earn more than 8% annually (which is possible) then you will have even more. Of course, the last 10 years you should start to invest a little more conservatively, so looking at the whole at 8% annually is probably good.

Sales Dude wrote:

Flagpole, thanks for the response.

1. I have an online savings account (3% + APR) with 5 months worth of paychecks, this is growing as I am saving for a house.

2. The only debt I have is my federal student loan. $7000 left. I am only slightly ahead of the minimum payments. Interest rate is pretty low this year (4% or so, but it fluctuates year to year based on some rate set in July each year).

3. I contribute only 6% toward a traditional 401k, plus 4% company match. This is the minimum contribution to get the max company match.

It sounds like I should go for a Roth IRA before the company stock. Do you recommend a vendor for this?

Forgot to answer your vendor question -- Vanguard is the best (www.vanguard.com). Low fees and so far no crooks there.

Your father-in-law can't be persuaded. Some people look at free money and decide that's the only way to go, but it's not really all free money because you would have paid a ton of money in interest to the student loan people. If you feel the need to argue with him on this point, all you can do is state some facts.

1) You no longer have $40,000 in debt that ties up your cash flow each month. Student loan debt is non-bankruptable, so you REALLY need to get that gone. Having this debt gone increases the likelyhood that you won't go into any debt other than for a house -- no credit card debt, no personal loan debt, perhaps not even a car loan. When you don't have payments to make to anyone, you can establish HUGE reserves and investment accounts QUICKLY. Tell him this is your goal.

2) Large amounts of debt affects the amount and perhaps rate of a future home loan if you need or want to get one.

3) You could tell him you had heard the stock market was going to fall and that you wanted to be more safe and invest in reducing your outgo. Turns out that it was a GOOD idea that you got rid of that loan and only now are putting money into the market.

4) Just tell him that debt makes you and your wife nervous. You sleep better at night knowing that you are debt free.

5) Explain to him how you can sink a TON more into your 401k and Roth IRAs now that you don't have a monthly drain to pay on a $40,000 loan debt.

6) Use the Bible. The Bible says "the borrower is slave to the lender", and you didn't want to be a slave.

7) Financial guru Dave Ramsey says to invest into retirement accounts ONLY AFTER you have NO debt but for a house payment (one that is 25% or less of your take home pay each month). This is common advice. The goal though is to become debt free QUICKLY, and you and your wife did that.

My best piece of advice though is to respect your father-in-law even if he is a know-it-all. You are married to his daughter whom he still sees as a little kid, so by association you are a kid too, and neither you nor your wife will EVER be as experienced as this father-in-law is as he will always be a generation older than you both. He doesn't have to wake up each day and look at your income and outgo -- YOU DO, so ALWAYS do what makes you the most comfortable. Getting along with the inlaws is the best thing you can do. You can even allow him to think that his way is best but that you're just too nervous about debt to have done it that way, and now you're going to catch up. It's IMPOSSIBLE to win the argument with him even though I side with your way of thinking. People who have always carried debt don't understand why someone else would be so concerned about carrying lots of debt.

You did the right thing. Now, sock away a ton brother! Retire rich!

Flagpole wrote:

[quote]johnyy11 wrote:

4) Just tell him that debt makes you and your wife nervous. You sleep better at night knowing that you are debt free.

This is your best response. My wife and I are trying to agreesively pay off our mortgage (we're in Canada -- mortgage interest is not a tax deduction) perhaps to the detrement of our RRSP (Canadian version of a 401K) contributions. We still contribut to our RRSP -- about 10% of our combined income, but we make signifcantly higher "double-up" and lump-sum payments against our mortgage. Why? six-digit debt freaks us out! Yes, our house is worth more than the outstanding mortgage balance, but for us, the ultimate goal of knowing that we completely own our house will make us feel very comfortable!

Much like your situation...sounds like you two just simply feel better knowing that you don't have debt hanging over your head.

Flagpole, thanks again. My gross income this year will be right around $61,000 give or take a few hundred dollars depending on my last bonus. These calculations you provided seem promising for the future.

I'm going to look into the Vanguard Roth IRA, put maybe a thousand or two next year, maybe one of the LifeStrategy funds? Or should I just do SAP 500 index? Or split 50/50 life strategy and index?

My full focus right now is saving for a house in my online savings account (I put away $1100 or so a month into that thing). The interest rate is decent. My GF wants to go on a big vacation next year as well, so I'll probably use my tax return for that.

Sales Dude wrote:

Flagpole, thanks again. My gross income this year will be right around $61,000 give or take a few hundred dollars depending on my last bonus. These calculations you provided seem promising for the future.

I'm going to look into the Vanguard Roth IRA, put maybe a thousand or two next year, maybe one of the LifeStrategy funds? Or should I just do SAP 500 index? Or split 50/50 life strategy and index?

My full focus right now is saving for a house in my online savings account (I put away $1100 or so a month into that thing). The interest rate is decent. My GF wants to go on a big vacation next year as well, so I'll probably use my tax return for that.

Here's the advice of 5 different financial advice people:

1) Warren Buffet -- put 100% of your investment money into index funds. Leave it alone.

2) Suze Orman -- put 90% into an index fund; 10% into an international fund.

3) Dave Ramsey -- 25% each into the following types of mutual funds - growth, growth and income, aggressive growth, international.

4) Bob Brinker -- he likes stocks and mutual funds. He says to have no more than 4% of your total investments in INDIVIDUAL stocks.

5) Jim Cramer -- Cramer is a short-term stock picking guy, so he likes individual stocks. He does say though to NEVER put more than 20% of your investment money into any one SECTOR of the market.

As much as I don't respect much of Suze Orman's advice (she works for FICO and therefore is constantly saying how great it is to have a good FICO score...good FICO scores just allow you to borrow money at lower rates...the goal should be to NOT be borrowing money at all), the top three above to me are the best -- safe yet with enough risk to bring good returns over the long haul. I have done Buffet's strategy and currently am doing Ramsey's strategy. It is TOUGH though to beat Buffet's advice.

If that girlfriend of yours becomes a wife, make sure that she's on the same page financially as you are before you say "I Do". Hopefully the wanting a big vacation isn't indicative of her wanting other nice and expensive things down the road. I've got nothing against big vacations, but of course the word "Big" is relative. We took our most expensive family vacation ever this past summer to Sanibel Island in Florida. Cost about $2,000 all told (we drove from Ohio for a cheaper trip down there), so that tells you how frugal we usually are. It was still awesome and tropical, and the Gulf of Mexico was like bathwater in June. People can put themselves into debt by taking big vacations every year when they can't afford them. before we had kids, my wife and I went to the Bahamas and spent about $1,700 for just the two of us. That was fun and not super expensive.

We've got some more really expensive trips planned for the future though as my kids are getting old enough to enjoy bigger and bolder trips. Hawaii is on the list as is Europe.