As the tax filing deadline of April 15th has come and gone, many of us are giving big sighs of relief that it’s all over—at least for now. If you were lucky enough to get some money back this tax season, you’re probably wondering what to do with it. Shopping spree? Vacation? While those ideas certainly sound like fun, the truth is that you’ll be best off investing it. After all, it’s not found money—it was your money to begin with. Look at your tax refund as the contents of a kind of rigidly enforced savings account and do something worthwhile with it that will pay off down the road. Check out these savvy investment ideas to make your tax refund work for you.
Many Americans seem to heed the call of the savings account, with three out of 10 people planning to save or invest their tax refund this year. Before you dump your refund into your savings, though, decide what you are saving for: set a goal. This will help you determine which investments are best for you. Do you want to invest money for a rainy day slush fund? Perhaps that dream vacation you’ve always wanted? Are you looking to make a large purchase, such as a house, car or motorcycle? Is retirement on the horizon? Take stock of your current financial situation and then decide where your money would be best spent down the road. Once you do, you’ll know exactly what to save for.
Let’s assume you got back between $3,000 and $4,000 from the government after tax day. Lucky you! The very first thing you should do is pay down some of your credit card debt or sock some away into your emergency fund. If you’re looking to grow investments but you are losing just as much in credit card or student loan interest, a strategy to invest all of your return doesn’t really make sense, says US News and World Report. Putting money in an emergency fund is a safe bet. For example, the $1,000 you put in now will still be worth the same later when you need to take it out—or more, if your emergency fund is held in such a way that it accrues interest. Your best bet for these accounts are high-yield savings and money markets.
Looking into the future and thinking long-term, you can really make the most of your return by contributing some of it to your 401(k) so you can take advantage of your employer’s maximum match. Those who are building a retirement account would be wise to open a Roth IRA using their refund money to ensure a tax-sheltered source of income. Educational plans, such as 529 accounts, are also a great idea. If you open up these types of accounts with your refund money, it can make the process that much easier. Plus, contributions to Roth IRAs can be deducted from next year’s taxes, making next year’s return all the sweeter.
Placing one big chunk of change into one stock isn’t your best bet. You’re better off diversifying instead and adding funds to your current investments. If you want to add to your portfolio, you may want to try a specialty bond or stock fund, which will satisfy your urge to take a fun risk yet won’t present you with the looming threat of losing it all if the stock market tanks.
Whether you decide to add to your current portfolio or invest in your 401(k), making an investment with your tax return now instead of blowing it all on a vacation will pay off in the long run.