This is an opinion piece with the typical disclaimer of this is not financial or tax advice. I’m just a guy that enjoys finance.
I believe an employee stock purchase plan (ESPP) is the most powerful investment tool for saving money — just behind 401k matching with its instant 100% return. The power of an ESPP comes from the discount given on your employers stock, up to 15% off market value. When shares are purchased this gives you an immediate 17.6% gain on your contributions. You contributed ten thousand from your salary, the purchase occurs, you are then holding shares worth 11.7k.
To get a true sense of the value you are recieving we need to look at these returns on an annual basis. More likely than not the purchase period is going to be shorter than a whole year, maybe six months or even just three. This means that this 17.6% gain is only over a six month period, so let’s see the annualized rate… 38.3%! To put things in perspective, the current annual interest rate for high yield savings accounts is around 4% (as of May 2025). The average annual return on the stock market is 10% (7% inflation adjusted). No other investment has this kind of return potential but there has got to be a catch right? High returns typically means higher risk. Remember, this is an employer sponsored program, it should be beneficial for you. This is not risk free though like a HYSA, but an investment with significant upside with risk that can be understood and managed.
Here is the most critical part of managing risk, always sell immediately. The discount you saved month for has been given and you are now holding shares of public equity trading on the stock market. It will take a few days for the shares to settle in your account after the purchase date, that is ok. That 15% discount gives you room for slippage if the stock trades downward. By selling immediately we are managing the risk that we hold out for higher returns, only to end up holding shares worth less than purchased for. This is a short term investment to boost savings, holding for more advantages taxation is not the objective. As this is employee equity, the standard risk factors of an unplanned trading freeze or a lockup period also apply. It is important to be aware and consider these risks but don’t let them immediately dissuade you.
I haven’t yet talked about the part I’m most enthusiastic about — the look back. Some plans offer a look back provision that doesn’t just look at the price on the purchase date, but back to the start of the grant. If your company is doing well and the stock price is going up, you can get even higher returns, with less risk from the increased effective discount. Say the stock was trading at $10 at the start of the grant and rises to $14 six months later by the purchase date. With a look back the shares are purchased at a discount from that $10 price. Making your $8.50 per share purchase worth $14 per share, an annualized return of 171% — yes you read that correctly! Contributing ten thousand dollars has now returned you over sixteen thousand in just 6 month. This is where ESPP really gets its immense power to act as a multiplier on your savings.
My hope is I have sparked your interest in taking advantage of this amazing employee benefit to further your financial success. One detail I have not touched on is the 25k contribution limit per year by the IRS, but we will have to save that for a more in depth guide to maximizing your ESPP benefit.