How to Invest Your Tax Return

Should I Invest My Tax Refund?
Should I Invest My Tax Refund?

Everyone looks forward to receiving their tax refund each year with great expectations. Oh the possibilities! Vacation! A new dress! But wait—think twice before you spend that refund frivolously. Just like your impressive vacation tan, the thrill of spending your tax refund will fade all too quickly. Instead of blowing through your refund all at once, think of your refund as an investment. The government essentially forced you to save this money (they just borrowed it for a little while) that you can now re-invest for something down the road.

Pay Off Credit Cards

According to Kiplinger’s, the average tax refund totals about $3,000. Don’t squander that chunk of change. Instead, use all or a portion of it to pay down some of your pesky debts. Paying off a balance on your credit card that features an 18 percent interest is like getting 18 percent back on your investments, which is an excellent use of that cash. Once you pay some cards off, you can then close them out, particularly those with high interest rates. Closing the accounts with the highest interest rates will help you avoid accumulating new debt in the coming year.

Fatten Your Emergency Stockpile

If you’ve been complaining for far too long that you live hand to mouth each week when you get paid, it’s time to start building up a nest egg. It’s a good idea to have enough money to last between nine months and one year saved in an easily-accessible account in case of emergency. Easier said than done when you’ve got weekly expenses that tap you out each time. When tax refund time comes around, this is a perfect opportunity to take that money and sock it away to build up that backup fund. You never know when you could get laid off or when you’re going to get hit with a big house or car repair bill.

Invest in Stocks/Bonds/Mutual Funds

If you’ve had your eye on a few investments, do some research, and depending on the level of risk you are comfortable with, buy shares in mutual funds and stocks or bonds may be good idea. USAToday states that you could double your tax refund money in 10 years. For example, by investing in an index fund that invests in large-company stocks that have posted gains of nearly 10 percent over the long haul, you could end up with $6,000 for your initial $3,000 investment. Not too shabby!  This is of course riskier than simply contributing to your IRA and R&G Brenner suggests that you consult with an experienced licensed financial planner before doing any investing.

Plan for College

No, not your college—those days are over—but your child’s college tuition. If you invest wisely, you can double your value for future college tuition by saving in a low-cost 529 college savings plan. You’ll want this cash to be readily available in low-risk bonds or cash when your child is in high school because before you know it, those college tuition bills will start rolling in and you will need to be prepared.

Pay Down the Mortgage

Paying your mortgage off sooner rather than later will free up your money to work for you in retirement. Having no mortgage as you head toward retirement will free up your money to do more of the things you love, like traveling.

Follow these tips for how to invest your tax return and you’ll be well on your way to building a nest egg and saving for your future. Happy investing!