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Invest Your Tax Refund

| March 27, 2019
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Well, tax season has (almost) come and gone. For adults like us, this time of year can be like a second Christmas. The stress of filing will soon be over, and some of us will have our tax refunds to look forward to. The question is: what will you do with yours?

Because tax refunds come outside our regular income, some people treat them like change beneath the couch cushions- it’s extra spending money! They think, “now I can buy that new technology gadget, or go away for a long weekend!” Others are more prudent, and use the cash to pay down their debt, handle every-day expenses, or line their savings account. How do we know? Back in 2011, CNN® did a study to see how most Americans spend their tax refund. This is what they found:

 

2007

2008

2009

2010

2011

Pay down debt

43.1%

46.5%

48%

43.9%

41.9%

Savings

38.6%

37.2%

38.9%

40.3%

42.1%

Everyday expenses

26.5%

27%

26.7%

28.8%

29.7%

Major purchase

11%

12.1%

11%

12.5%

13.2%

Vacation

13.3%

12.1%

11.1%

10%

11.9%

Other

7.2%

7.5%

7.5%

7.3%

6.7%

 

 

As financial advisors, we don’t have a problem with any of these categories. It’s always good to save, and it’s always good to pay down your debt. It’s equally important to enjoy the money you’ve worked so hard to attain and to take a break from work life and reward yourself. So, if there’s a dream vacation you’ve been planning to take, go for it! Just remember to send a postcard.

                                                                                BUT. (And there’s always a “but.”)

 Don’t spend your tax refund for the sake of spending it. Don’t just stick it in a savings account because you can’t think of anything else. As financial advisors, this is something we feel every investor should remember. Our philosophy is that the money you earn not earmarked for expenses should be put toward reaching your goals. Remember, the goals can be short-term, mid-term, or long-term. So, if one of your goals is to see the beaches of Copacabana, then there’s no harm in using your tax refund to go there. But If you don’t have a goal like that in mind, it would be a mistake to think:” okay, I’ve got my refund… might as well have some fun in Vegas next weekend!” That’s not a goal, it’s a whim. And we think it’s a shame to waste your tax refund on a whim.

Instead, consider investing your tax refund! It’s not sexy or provide immediate gratification, but it could make you happier down the road. Why? Because achieving our goals is always a bigger thrill than satisfying our whims.

Now, we don’t think you should invest your money just to invest it, either. That’s why we'd advise you to invest in a way that will help you reach your goals. For example, maybe you want to help your child or grandchild attend college. You could use your refund to start a 529 plan, where it will grow until the child or grandchild needs it for tuition or supplies. If you want to travel the world a few years from now, there are ways to invest for that too.

Here’s the point. Never give up the things you want the most for the things you only want right now. Investing your tax refund is a fantastic way to get that much closer to the things you want most in life. A refund is a vehicle you can use to reach your goals; investing is the road that takes you there.

 So, here’s what we propose. If you get a refund, don’t do anything with it immediately. Instead, take five minutes to stop and think. Would using the money now really get you what you want…or is investing it the smarter choice? It’s at least worth considering.

 If you aren’t sure, give your advisor or us a call! Sit down and review your goals and what it takes to achieve them. We’ll be happy to show you what your options are, and how to put your refund to the best possible use.

Remember, investing might not be sexy, and it might not be immediate…but the things you want most will always bring you more happiness than the things you only want right now.

 Regardless of what you do, enjoy the refund!

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