Congratulations! You’ve dutifully paid Uncle Sam all year and now you’re getting some money back from him! The average American is getting back $3,034 from the IRS this year—that’s a 3% increase over last year’s tax returns.
Money like that is nothing to sneeze at. $3k is a lot of money, even to upper middle class tax filers. Before you go out and buy a new flat screen TV or book a trip to Disneyworld consider these alternative investments for your refund check.
I promise you everything I mention below is something that will make you even more money in the not so distant future. You could possibly turn that $3,034 refund into a huge payday. At the very least you’ll put yourself one step closer to achieving financial freedom—something we all want, no matter what tax bracket we fall into.
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Perhaps one of the best investments you can make is to refinance your mortgage. Refinancing isn’t cheap, closing costs will run you thousands of dollars. But it can also save you thousands of dollars by reducing the amount you of interest you will be paying on your home, it will also lower your monthly mortgage payment.
Today’s rates are still really low comparatively. You’ve missed the bottom of the interest rate market, but you’re not that far from it. It’s still possible to get rates under 4.5% for a 30 year fixed and under 4% for a 15 year fixed. If your current rate is at least one full point over either of those rates and you don’t plan to move for the next three to four years, then you should consider spending your tax refund on refinancing your current home loan.
While it will probably take you about 2 years to make back what you will have to spend on closing costs, the monthly savings will go on long after that. This is one of those instances where you have to spend money to make money.
Another ‘spend money to make money’ investment idea for your tax refund is to start a college fund for your child or grandchild. Many states offer something called a 529 plan, these are state-run investment accounts that allow parents and relatives to deposit money, and then sit back and watch their money grow. Once junior is ready for college, parents can then withdraw the money, tax-free of course, to pay for tuition, books, room and board and other college related expenses.
The more time you allow your investment to earn interest and grow, the more money you’ll have for Junior’s future education needs. If you deposit your $3,000 tax refund in a 529 college plan for your child, contribute as little as $25 a month for the next eighteen years and earn at least 8%, you’ll have over $24,000 when Junior is ready for college. That’s enough to pay for about 2 years at a state university.
Most plans even allow parents to withdraw the money if their child decides not to go to college in the future. Each state has its own set of rules, and some state’s plans are better than others. Look up information about your state’s 529 plans at savingforcollege.com.
If saving for Junior’s future isn’t right for your situation, then I suggest investing in your own future by depositing your tax refund into your retirement accounts.
Start by maxing out your 401(k) account. The maximum you are able to contribute is $17,500 a year. If you’re not putting $1,450 in your 401(k) each month, then you’re not maxing out your account. You want to deposit funds in this type of account before you max out any other type of retirement accounts because these types typically receive an employer match. Your employer is literally paying you to save money for your retirement. I don’t know about you but I never turn down free money.
If your employer doesn’t offer a retirement plan or you’re on track to max out the account this year, then you should put your tax refund in another type of retirement account, like an IRA. IRA’s are more appealing than 401(k) accounts in a lot of ways because you have more investment options. Typically in a 401(k) you’re limited to investing in just a few types of mutual funds and bonds. In an IRA your choices are nearly limitless. You can invest in stocks, mutual funds, ETFs, annuities, even out of the box investments like wineries and new businesses.
No matter which investment account you choose, you’ll be doing yourself a big favor. If you put your $3,000 tax refund in a retirement account and never contribute to it again and it earns 8% a year (this past year’s stock market earned 29% by comparison), you’ll have more than $20,000 in just 25 years.
If you do one better and contribute just $50 a month, you’ll wind up with nearly $65,000 in that same amount of time. That’s the power of compound interest. Plus as an added bonus putting this year’s tax refund in an IRA or 401k will help lower this year’s tax bill.
You might be wondering whether you should pay off your credit card debt or do one of these other investment ideas. I can’t make a blanket statement because I don’t know the details of your personal situation but for most people, paying off a high interest debt should come first. If you owe thousands of dollars on your card and are only able to make the minimum payment then you should use your tax return to pay down your debt load.
Most people have credit cards with interest rates above 17% right now. Over time interest rates in that range can double, or even triple the cost of every item you buy on credit. So that lunch you bought yourself yesterday for $10 can end up costing you $20-30 if you don’t pay it off at the end of the month. Do you really want to be paying for yesterday’s lunch for the next 5 years? Use your tax refund as an opportunity to cut down or completely resolve your credit card debt.
There is one final recommendation I want to make to you. I saved it for last, because it is the best idea. And by best I mean it has the most potential to make you far richer than the amount you received back from Uncle Sam. If you want to truly grow your money, you should invest in your best asset—yourself.
You’ve always wanted to start a home based, online business but there has always been something standing in your way, am I right? The time isn’t right or you don’t have the money to start a business. Your tax return represents a perfect opportunity to overcome those obstacles.
Any investment you make in starting your own online business has the potential to make you more money than you’ve ever dreamed about. Heck just taking a portion of your tax refund has the potential to make you a millionaire many times over.
And really the money is the bonus, because you’ll also get benefits like working from home, less stressful work environment, never having to wear stuffy suits to work again, no boss hanging over your shoulder or making you feel bad so you won’t ask for that raise you know you deserve. You’ll never have to play office politics again or commute to work through waves of stop and go traffic.
What you will have is a flexible schedule, low stress, ability to live anywhere, financial freedom, pride in yourself; not to mention your friends will be jealous of you for doing something they’ve always wanted to do themselves.
Take your tax refund and invest in yourself. You are your best asset and only you can make your dreams come true.
Keeping Money in Your Pocket,