Tax season is finally over and getting a refund can take some of the sting out of a deadline many Americans dread. In 2016, taxpayers got back $2,995 on average, according to the Internal Revenue Service (IRS) and refunds were expected to be roughly the same for this year.
When a refund is headed your way, the big question is how to make the most of it. While you could treat yourself to a vacation or go on a shopping spree, there may be a better to put it to work: investing it.
A 2016 Bankrate survey found that 46% of millennials blamed a lack of money on why they weren’t playing the market. If you’ve been using a lack of cash as an excuse to put off investing and saving for retirement, your tax refund could turn things around.
What not investing can cost you
The biggest advantage younger investors have isn’t necessarily how much money they’re saving each month or each year. Instead, it’s time. The sooner you start saving, the longer your money has to grow. If you put off investing because you think you can’t afford it, you’re going to have to work that much harder to catch up down the line.
Here’s an example. Let’s say you got a $3,000 tax refund this year and you’re 25 years old. You decide to put that money in a Roth IRA and add $100 a month to it for the next 40 years. Assuming a modest annual return of 6%, you’d have $227,714 by age 65. Now, let’s say you wait another 10 years to start saving. With the same initial $3,000 deposit, $100 monthly contribution and 6% rate of return, your next egg would shrink to $117,792.
That’s a loss of over $100,000 just because you opted to wait longer to save. To make up the difference, you’d have to double your monthly contributions to $200. That doesn’t seem like a lot but if you’re in your mid-30s and you’ve got your sights set on buying a home, every penny counts.
But wait. Shouldn’t I pay down debt first?
The struggle with student loan debt is real for millions of Americans. On average, the Class of 2016 grad left school with over $37,000 in student loans. Since 2008, total student loan debt has increased by $700 billion, according to Federal Reserve data. At the same time, credit card debt is once again creeping towards pre-recession levels. The average household that has credit card debt owed $16,748 on their cards in 2016.
When you’ve got debt, you may be torn over whether to put your extra cash—including your tax refund—towards it or jump into investing. That’s an especially tough issue to tackle if you’re carrying high interest rates on your credit cards or paying your student loan servicer each month feels like a soul-sucking experience.
In that scenario, you have to look at the bigger picture. Sure, debt can be a drain financially and emotionally but you can’t borrow to pay for your retirement. As the previous example demonstrates, waiting 10 years or even five years to get started investing can dramatically impact your long-term financial outlook.
Finding ways to make your debt more affordable is a good compromise if you’re hesitant about investing your tax refund. For example, if you’ve got student loans, you could try refinancing or consolidating them to lower your rate and your monthly payments. Transferring high interest credit card debt to a card with a lower rate is another option. Paying off debt faster should be a priority but it shouldn’t come at the cost of your retirement.
How to invest your tax refund
If you’re committed to making the most of your tax refund by investing it, there are two important questions you need to ask yourself:
- What type of investment account do I need?
- What do I want to invest in?
The easiest way to answer these questions is to think about your goals and objectives. If you don’t have access to a retirement plan at work, a traditional or Roth Individual Retirement Account offers a tax-advantaged way to save for your later years. On the other hand, if you’re already putting some of your income into a 401(k) or you want to test the waters as a newbie investor, you may prefer a taxable account instead.
As far as making individual investment choices goes, this can be tricky when you don’t have a lot of experience with investing. If you don’t understand the difference between stocks and exchange-traded funds, for example, you may not have a clue where to start. Motif attempts to solve this problem by offering pre-designed portfolios that include a basket of stocks and/or ETFs, based on a specific theme.
For instance, if you’re trying to be more globally conscious, one of Motif’s Impact Portfolios might do the trick. You can invest with a bent towards promoting a sustainable planet, fair labor or good corporate behavior. For one monthly fee, you get a portfolio of stocks that’s designed to align with your values. Your investments are automatically rebalanced so it’s a relatively hassle-free way to diversify and manage risk while doing good for the world at large.
Don’t make investing a one-time thing
Investing your tax refund is just the beginning to building wealth. To really see your assets grow, you need a systematic plan for saving over time. Adding money to your retirement account or a taxable account regularly, even if it’s just $25 or $50 a month, is key. The more consistent you can be in approaching your investment strategy, the better the payoff is likely to be.
Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.
Information provided is for illustrative purposes only and not intended to represent recommendations for investment of any particular investment or strategy. Investing in stocks involves risks you should be aware of prior to making your investment decision. Each investor needs to review an investment strategy for their own particular situation to determine their suitability for an investment before making any decision. You are responsible for all investment decisions you make.
Published at Tue, 02 May 2017 19:28:20 +0000