HELOC + ESPP (or 0% Credit Cards) = FREE MONEY (15% to 60%+ returns)!

For anyone that has available Equity in their home and an unused potential in their employers ESPP program should really pay attention! For those that are playing the shell game with 0% credit card interest rate arbitrage and ask, "Hmmm, where could I get a guaranteed 10% or 15% return?", well read on, how about a 40% or even 60% annual return! I've been giving away some free money and I'm not happy about that. I'm correcting that, toot-sweet! I hope all of you will review your circumstances and consider doing likewise, if it makes sense and you have availability to your ESPP that you aren't currently funding to it's max potential.

I have available equity, like most people, that I just realized I could be putting to work. Recently I've pulled back on my ESPP contributions, for at least the last year now, in favor of maxing out my 401k. Of course that's a good option, but I've been thinking and came up with a novel idea. So, no more wasting the potential of my ESPP. Here's a simple example. My employer offers an ESPP that plan with 15% discount on stocks every quarter. So, that's a 60% annualized return. Take a look and see how that works out:

  • Jan-Mar: Contribute 0-15% of your income and purchase your companies stock at 10% discount. At which time you can sell immed for 10% gain or hold and sell at a later date. Let's look at an example of $50K (take home pay) after taxes. This would break down to about 4200/month after taxes. Example: 15% of $4200 = $630. contributed montly x 3 months = $1890. Sell immed to lock in 15% gain of 283.00.
  • Apr-Jun: same thing as above. Total contributions of $1890.00. 2nd 15% gain of 283.00.
  • Jul-Sep: same thing as above. Total contributions of $1890.00. 3rd 15% gain of $283.00.
  • Oct-Dec: same thing as above. Total contributions of $1890.00. 4th 15% gain of $283.00.
  • Total contributions for year: $1890 from Heloc x 4 (i.e. recycled 4 times)
  • Total of 15% quarterly returns: $1132.00
  • Total return on initial $1890 HELOC contribution: 60% annual return!!! Now that rocks!

Now, please correct me if you think I missed a point, as I'm just thinking about all of this and planning to implement shortly. I plan on starting this Jan 08, so I'll see how it actually works out. Here's how the quarterly draw and money management would work:

  • Jan 08: Draw $1890.00 from your HELOC Account that you'll be contributing from your payroll for Jan-Mar contribution period. Deposit that amount in your checking account that you normally use for bills, etc. Make min payments to HELOC every month.
  • Jan 08: Max out your payroll contributions so that $1890 is drawn from payroll during Jan-Mar 08 contribution period
  • Apr 08: Stock is purchased with your contribution. Sell this stock immed, or put stop loss to increase potential returns even more!
  • Apr 08: Deposit the $1890.00 from your stock sale proceeds into your checking account that you normally use for bills, etc.
    remaining $283.00 is your 1st 15% return (use in your checking if you want to help bridge between subsequent stock purchase and sell periods or apply payment to HELOC to reduce principal).
  • Apr 08: Max out your payroll contributions so that $1890 is drawn from payroll during Apr-Jun 08 contribution period
  • Jul 08: Stock is purchased with your contribution. Sell this stock immediately, or put a stop loss on it to increase your potential returns even more.
  • Jul 08: Deposit the $1890 from your stock sale proceeds into your checking account that you normally use for bills, etc. The remaining $283.00 is your 2nd 15% return (use it in your checking if you want to help bridge between the subsequent stock purchase and sell periods or apply payment to HELOC)
  • Jul 08: Max out your payroll contributions so that $1890 is drawn from payroll during Jul-Sep 08 contribution period
  • Oct 08: Stock is purchased with your contribution. Sell this stock immediately or use a stop loss to increase potential returns.
  • Oct 08: Deposit the $1890 from your stock sale proceeds into your checking account that you normally use for bills, etc. The remaining $283.00 is your 3rd 15% return (use it in your checking if desired or apply payment to HELOC).
  • Oct 08: Max out your payroll contributions so that $1890 is drawn from payroll during Oct-Dec 08 contribution period
  • Dec 08: Stock is purchased with your contribution. Sell this stock immediately or use a stop loss to increase potential returns.
  • Dec 08: Deposit the proceeds into checking. Wash ... rinse ... repeat for next year if desired
  • Dec 08: pay off remainder of HELOC balance on original $1890 plus interest.
  • Dec 08: Count your returns of $283 x 4 = $1132 (i.e. 60% profit, less any interest paid on HELOC probably no more than 8% or 9%).

Considerations and things to think about:

  • The one drawback with this strategy is that you can't get an endless stream of high percentage returns (i.e. your limited to your 15%, etc. max payroll deduction amount). But, that doesn't mean you can't offer to loan money to any of your coworkers and teach them how to do it (especially if they don't have HELOC money avail). That's still leaves a great return on investment if you split it with your coworkers. Anyone know if there's any problem with going this route? Obviously the drawback is that your coworker might not be that on top of money, like you :-)...
  • If you're not currently maxing out your 401k, then you should definitely do your best to try and max out your 401k contributions
  • By concentrating your efforts on maxing out your 401k, then you will likely not have funds to max out your ESPP potential, in that case you should look at using your HELOC to fund your ESPP to it's max potential as above
  • Many ESPPs have even more advantages for you to make gains beyond their 10% or 15% (or whatever their discount stock purchase % is). Some companies allow you to purchase at an even lower price, based on lowest price of 1st date or contribution period or last date. So, if the stock price at the beginning was 50% lower than the end, you get to purchase at 50% + your discount percentage 10% or 15%, etc. from the current stock price. This makes even more gains!!! The Wonderful World of Employee Stocks, Part 3: Don't Poo-Poo Your ESPP
  • As mentioned above, profiting from 0% credit card offers makes a lot more sense now. Traditional methods discuss putting the money in savings accounts and using that gain, well ... how about the percentage gains above!More on How to Make Money with 0% Credit Card Transfers (And Five Reasons Not to Try). The only thing I'd caution against with 0% Credit Card offers, is that they are real tricky to manage, and I'd still advise going with the more sane cheap money avail to you through HELOC, if you have it.

You'll find this post on the following carnivals:

Money, Finance and Fancy: The Carnival of Personal Finance #132, Whimsical Christmas Edition

118th Carnival of Debt Reduction - Winter Solstice Edition

5 comments:

MarNan6 said...

This is interesting but aren't you going to get hit for Short Term Capitol gains versus holding on to it for a year and taking the hit on long term cap gains? Does the hit on Short Term Cap gains taxes almost negate the 40%-60% gain you mention?

Thank you.

Anonymous said...

Plus what about the trading fees- my brokerage house thru which employer operates ESPP charges 19.99 a trade

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