A tax refund can be viewed as a major windfall, especially for those who may not have not been expecting a refund. All too often, however, a tax refund is spent rather than saved and the money does nothing to improve the financial life of the taxpayer.
Although simply saving the money is always a good choice, an even better choice is to invest the money. Modern money advice is all about getting money to work for you, rather than you simply working for it. Today’s modern financial markets provide numerous opportunities to invest a tax refund and one simply need to decide where to put the capital to work based on risk tolerance and other factors.
According to nerdwallet.com, index funds are a simple, hassle-free way to invest. The beauty of index funds is that the funds are comprised of a number of stocks combined to form a single package. This means that investors do not need to try to pick single stocks and the funds already have a degree of diversification. Not only that, but investors can still earn dividend income from the stocks contained in the fund.
Pay Down Debt
Debt is a major problem, and it can stand in the way of financial freedom if not addressed. Credit card debt, for example, can carry interest rates of 15 to 25 percent or more, making it extremely expensive to carry the debt. According to an article from marketwatch.com, investors are not going to make more money in stocks than the interest they pay to carry debt. If you are looking for the best bang for the buck, therefore, using a tax refund to pay off debt may be the best bet.
Invest in High-Yield Savings Accounts
A very simple solution for some investors may be to put the money away into a high-yield savings account. Even with interest rates still at low levels, rates have now come up enough in recent years to make a high-yield account attractive. Some of the biggest benefits of this account type include safety and liquidity. Money can be easily moved from savings to checking or vice-versa. Deposits in an approved bank or financial institution should be insured by the FDIC for deposits up to specific limits.
Mutual funds are another tool for investors who want a simple solution to their investing needs. Unlike an index fund, which is based off an index, mutual funds may be based on a wide variety of parameters. Some funds may focus on the energy sector, for example, while others may focus on emerging markets. Like an index fund, mutual funds are comprised of a group of stocks. This basket of stocks is managed by a portfolio manager and is subject to change. Mutual funds can provide exposure to specific areas that may be desired by investors, but will often do so with a significantly higher cost.
Before investing, make sure to consider your goals, risk tolerance and time frame. Only after careful consideration of these factors should you look to invest your tax refund. Regardless of how you choose to invest the tax refund, the important thing is to get that money working for you instead of you working for it.