So you've made the deadline, filed your tax returns ahead of 2017 Tax Day, and you're getting a refund. Now what? While it might be tempting take the money and run out to spend it on a shopping spree there are good reasons to invest your tax refund instead. LearnVest advises that a big tax refund isn't necessarily good news because a refund is basically money you've loaned the U.S. government — without making any interest on the loan.
"It’s not the smartest financial plan, especially if you’re lugging around credit card debt, student loans, or a negative balance of any kind," LearnVest Planning Services certified financial planner Lorrie Minor says in an article on the LeanVest website. "Instead of loaning that money to the government, you could be making that money work for you — and earning interest on it at the same time."
I know this all sounds a little confusing, but here's how it works. According to ARAG Legal, "The typical scenario goes like this: when you receive a paycheck, your employer withholds a certain amount of money in taxes to send to the IRS. At the end of the year, you look at the money that was sent to the IRS and compare it to the amount you owed the IRS. After deductions, your tax refund is the overpayment of your taxes that the government owes you. In essence, you’re essentially getting your own money back instead of the 'bonus' it feels like you’re receiving."
So what should you do with your money? Here are seven reasons to consider investing it.
1You Need To Save For Retirement
I usually think of retirement as some far off in the future time, and the fact that I feel perpetually 17 years old doesn't help matters. But, in reality, we're all going to need money for retirement some day, so why not start saving now? If you're getting a big refund you might want to adjust your withholdings for the coming year and contribute more toward your retirement fund.
According to LearnVest, when you let the government sit on nearly $3,000 for up to 12 months, you’re giving up an opportunity for savings that could be earning interest. They suggest that instead of waiting for the IRS to refund you your overpayments each spring, you bump up your 401(k) contributions by a percentage point or two (or more). Over several decades of your working career, this change could earn you a more comfortable existence for your retirement.
"There are ups and downs in the market,” Jude Coard, a tax partner with Berdon LLP in New York City told LearnVest, "but if you’re a long-term investor and you don’t put that money in until you get your refund, you’re basically losing a year’s worth of appreciation on it.”
2A Rainy Day Fund Is A Good Idea
While life in your 20s and early 30s can often feel like a day-to-day marathon of the Hunger Games, but if you are in a stable financial situation socking some money away for an emergency is a good idea. Most financial planners suggest that you have a minimum savings of six months of living expenses for unexpected emergencies.
"Life usually comes with many twists and turns, like a major car repair, medical bills or even the sudden loss of a job — which can all put a sudden strain on your monthly budget," ARAG Legal advises.
If you're getting a sizable refund, consider putting it int a high-interest savings account for unexpected expenses.
3Investing In Short Or Long-Term Goals Is Smart
Do you need a new car, a different apartment, or a boost in your education? Consider investing your tax return in one of your short or long-term goals.
"While this may feel like you’re simply splurging on a big ticket purchase, you’re actually working toward a goal and reducing the need to take out a huge loan or put it on a credit card, which just creates more debt," advises ARAG Legal.
Buying or leasing a car, or moving (hello, first, last, and security), usually requires a down payment, and your tax return could help you put more money down up front to reduce your monthly payments, easing your load in the long run.
4You Can Turn It Into More Money
You've probably heard the phrase, "make your money work for you." I mean, it's really about time your money got a job instead of just sitting around in your bank account eating bonbons all day. Investing your tax return in CDs, stocks, bonds, retirement savings, or a combination of places can help you get the most bang for your buck by allowing you to take advantage of compounding interest.
"Simply stated, compound interest means that you earn interest on the original amount you’ve saved, and then you continue to earn interest on the interest," ARAG Legal advises. "When you choose to save or invest your tax refund, you have the potential to make money on the interest in your account that accrues over time."
If this all sounds super confusing, consider talking to a financial planner. You can even consult some online services like LearnVest or ElleVest.
5Free Yourself From Debt
If you have high interest credit cards, or student loans, using your tax return to pay down some of those balances is a great idea.
"Start with debts with the highest interest rates; eliminating these will save you the most money in the long run," advises TurboTax. "If you don't have any credit card debt, use your tax refund to reduce your car or student loan debt."
Basically, if you're making monthly payments to something that is charging you interest, putting your tax return toward that can help you get out of debt faster.
6Investing In You Is Important
The most important person in your life should be you, and there is nothing wrong with investing your tax return in yourself. Do you want to attend a conference? Need some professional development? Maybe you want to learn a new skill like photography or coding. Take your tax return and put it toward something that will make you a better you. You'll thank yourself later.
"Using your tax refund to pay for additional training, tuition, a work-related conference or membership in a professional organization is an investment that can pay off for years to come in bigger paychecks and greater job stability," NerdWallet advises.
7Organizations Need Your Help
If you're financially secure, and you've exhausted the other six options, consider making a tax-deductible donation with your tax refund. There are hundreds of organizations that need your help right now, including Planned Parenthood, organizations that support the arts, the environment, protections for the LGBTQIA community, immigrants, and more.
While tax season is stressful, finding the right place for your refund can help you become more financially secure in the long run, so before you squander that cash, consider turning it into a money-making stash.
