The average amount of tax refund for the 2016 tax year was around $3,000. This may not exactly be an earth-shattering figure, but it is still a nice chunk of money for a refund of the same amount or more this year.
One could easily splurge the tax refund for a luxury vacation, blow it on a trendy pair of designer heels or couture kicks, or use this to buy the iPhone X or drones. But you need to bear in mind that a tax refund isn’t precisely “found money,” and it has always been your hard-earned money.
A much wiser move is to invest your tax refund in something that would generate more lasting impact and returns. Assuming that you don’t have any high-interest-rate debts that require immediate attention, here are some ideas on where to invest tax refund:
Invest in the future
Emergency Fund – Having a comfortable emergency buffer enough to cover three to six months’ worth of expenses is not only a sound investment, it will help you sleep soundly at night. Your tax refund could be a good start or addition to building an emergency fund. You can add a portion or all of your refund to help you reach your target amount. After all, you can still religiously deposit every month to your emergency fund.
Retirement – The earlier you save for retirement, the more time it has to grow. Boost your 401(k) by investing in a Traditional or Roth Individual Retirement Plan (IRA). With the Traditional IRA, your contributions may be tax deductible, earnings grow tax-deferred, and you pay tax when you withdraw money, which usually happens at retirement. With the Roth IRA, contributions are made with after-tax dollars, and you may withdraw earnings tax-free and without penalty after age 59 ½ (provided the account has been open for at least five years). You can balance your contributions to both tax deferred and non-tax deferred IRA types to manage the tax effects upon retirement.
College – Invest in your children’s education by contributing to a 529 College Savings Plan. Contributions may be tax-deductible and withdrawals for qualifying educations expenses are tax-free.
Insurance – You’ll never know when tragedy will strike. Purchasing and keeping your insurance ( e.g., life, health, liability, home, etc.) up to date will offer financial protection for you and your loved ones.
Invest in profit-making activities
If you are in the position where your future financial needs (as discussed above) have been sufficiently covered, then maybe you’re asking where to invest tax refund that will give you potential income or returns. Here are some of the best ways to use your tax refund:
Open a brokerage account – Do your homework and diversify your portfolio to manage risk. If you don’t have the time to study and pick individual stocks, the easiest way to do this is to invest in a mutual fund or ETF (exchange-traded fund).
Funds usually hold 50 or more stocks or even some bonds and typically track a wide range of stocks or an index, such as the S&P 500. Depending on your goals, you can invest for the short-term (hold for 3 years or less and sell/convert to cash) in products such as money market funds, certificates of deposits, and short-term bonds. Or you can make long-term investments and wait for the payoff after several years.
Open or purchase a business – You can use your refund as start-up funding for your dream business or side project. In case you don’t have the time or resources to go into it full-time, you can always start small and engage in the activity during weekends or on a part-time basis.
Invest in yourself – Invest in your human capital and boost your income in the long run. Sharpen your skills by attending continuing professional education courses or pursuing additional certifications. Who knows? You might even learn enough to branch out into a different field or turn a hobby into a serious career.
Now the question: Where to invest tax refund money? It’s up to you. All those above suggestions will guarantee that you’re not just wasting your hard-earned money.