Two Ways to Get Free Money and Accelerate Wealth

We all know the saying: There’s no such thing as a free lunch. And while, in economic terms, Milton Friedman was right, when you choose to create wealth you open up doors with lunches behind them that over time feel very free – and very satisfying. Where are those doors? They’re among your workplace benefits. And what very free, very satisfying lunches am I excited to talk about? The 401(k) and the Employee Stock Purchase Plan (ESPP). They are two ways to get free money and accelerate wealth.

Free Money Move #1: Your 401(k)

Although as readers of this blog you may take a deep dive on the 401(k) as “table stakes,” but I’ve found that despite its seeming ubiquity, employees rarely list the 401(k) among their most desired or popular workplace benefits. It should be, though.

The 401(k) didn’t always exist

The 401(k) is a retirement savings and investing plan that some employers offer to employees. It, along with similar plans, are called defined contribution plans. Employers contribute a pre-determined amount to only those employees who choose to participate. Further, employers bear no long-term responsibility for those contributions, how they’re invested, or how those investments perform. It wasn’t always like this, though. Just a few decades ago, most employees relied on defined benefit plans – commonly known as pensions – to fund their retirement. Pensions are different because employers promised employees certain monetary benefits in retirement and bore all the responsibility for funding them, irrespective of market dynamics or investment performance.

An accident shifted the retirement burden onto YOU

The 401(k) dominated the pension almost by accident. The Economic Policy Institute reports that in 1980, a benefits consultant almost randomly suggested the 401(k) to revamp a bank’s cash bonus plan. The 401(k) was a huge hit among employers. Pensions are expensive and complex for employers to manage. They must use corporate earnings to fund them while constantly trying to predict how much money they’ll owe to their retirees. And corporations have been (in)famously bad at these predictions. General Electric, for example, recently froze its pension plan for 20,000 employees to save itself upwards of $8 billion. It should come as no surprise, then, that even though Congress never intended the for employers to ditch pensions for 401(k)’s, that’s exactly what they did. Now, only 15% of private sector workers have access to a pension.

Let’s take a minute to flip the script and see what this means for employees. With a pension, employees know how much retirement income to expect and when to expect it. They theoretically could worry not one bit about saving for retirement. Those days are over. Now, employees must manage their own financial destiny. They must use a tool economists, legislators, and even the 401(k) creator himself have called a scam for the average American worker.

Your retirement burden is therefore larger and more urgent

American employees face contribution and investment risks with the 401(k), but should still participate it in. However, only 47% of all private-sector employees did so as of March 2020. This number has declined since the beginning of the 21^st century, when approximately 60% of American employees participated.

The numbers for Black employees are far worse, by at least 10%. Black employees contribute to their 401(k), but they do so at rates between 22% and 50% lower than their White counterparts.

What does all this mean for Black professionals? It shows how critical it is to take charge of our wealth. Participating in the 401(k) plan is a great way to do that. If your employer is among the 28% percent of American businesses that match contributions, take advantage!. It is through employer matching that you can earn free money and accelerate your wealth.

While it is generally a sad statistic that so few employers offer a 401(k) match (and that the median match is, in my opinion, a paltry 3%), it is money worth getting.

Free Money Move #2: ESPP

Employee stock purchase plans let employees buy company stock (up to the yearly IRS-determined limit) at a discount. Each plan is company specific. The amount of your discount will vary between employers, but some plans let employees buy company stock at up to 15% lower than market price. Employees select what percentage of their pre-tax income they’d like to divert via payroll deductions to ESPP per offering period (typically twelve months). This money goes to the employee’s personal ESPP account. After each purchase period (typically three or six months) the personal ESPP account balance is used to purchase the discounted company shares. Data on the percentage of employers that offer ESPP are hard to come by. Some indicate that roughly 49% of S&P 500 companies and 38.5% of Russell 3000 companies offer this benefit to employees.

If you work for one of those employers, take advantage!

I’ll use an example to illustrate why:

Tiffany works for publicly traded company ABC as a global marketing manager. She earns $120,000 per year. The company offers an ESPP that lets Tiffany buy company stock at a 10% discount. Tiffany decides to divert 10% of her pre-tax income to ESPP, which means that each pay period $500 will be diverted to her personal ESPP account. There are four purchase periods in each offering period at ABC. So, from January 1 – March 31, Tiffany diverts $3,000 to her personal ESPP account. On the purchase date (March 31), ABC’s stock price is $200. Tiffany therefore gets to purchase ABC’s stock at $180, ten percent below market value.

Instead of receiving just 15 ABC shares in her account, Tiffany gets ~16.67 shares. Tiffany decides to sell them immediately. Assuming that ABC’s stock price is still $200, Tiffany earns $3,333.33 from the sale, booking $333.33 in profit.

There are several important tax and asset allocation considerations tied to when you sell ESPP shares based on the type of plan your employer offers. The example above simply shows how, in exchange for diverting cash to ESPP, you can earn free money and accelerate your wealth.

What are other ways you’ve earned free money to accelerate your wealth?