Thursday, March 19, 2015

How to Invest Your Tax Refund Wisely

It’s tax time. You will either receive a refund or owe taxes. Many taxpayers get excited when they receive their tax refund. Many have grand plans to use it wisely but once they receive the money quickly forget about those plans and spend it leaving them sometimes worse off than they were before received the tax refund.

A tax refund is the amount of money you over pay in taxes in each year.  A tax refund is just another way to help the government make money.  The money each taxpayer pays during the year is put into a high interest bearing account and the government keeps the interest.  The money given in a tax refund is small compared to the money earned each year from the millions of taxpayers in America.

There are only a few instances when you should overpay: if you are trying to pay down debt or want to pay off your mortgage or car loan off faster or if you know you will owe taxes.  If you work hard all year long why do you make yourself wait to get back money you earned?  Get your money upfront by adjusting your tax withholdings.  Consult a tax professional to make sure don’t end up owning money at the end of the year.

If you are struggling to pay bills or need to get out of debt your tax refund can be a lifesaver. But, it is up to you to determine how to spend it.  The government does not bail out individuals and if you don’t come from a wealthy family, you are the only one you can depend on so make wise choices with your money because no one knows what the future holds.  It is easier to stay in debt, swipe that debit or credit card and stuck our head in the sand.  It takes courage to look at your situation and make a decision to do better.

I was $19,000 in credit card debt after graduating college and only making $21,000 a year. It was the hardest 4 years of my life but I learned valuable lessons that no bankruptcy lawyer, credit counselor or financial advisor could teach me.  I learned the hard way and those lessons were never forgotten.  Remember what your grandparents said and save for a rainy day. Here are 4 steps to use your tax refund wisely.

Invest $500

  • Buy a mutual index fund
  • Open a discount brokerage account and buy individual shares
  • Open an IRA or  index fund with a low expense ratio under 1%
  • Open a CD, higher interest rates can be found with online banks or longer CD terms (1-5 years)
  • Open an online high interest money market account that has no fees or minimum balances
  • Open an online interest checking accounts that earns 3% or more
  • Open a DRIP (dividend reinvestment program) to buy stock directly from companies and automatically reinvest the dividends earned from the stock
  • Join an investing club, they usually charge a membership or annual fee to join.
  • Pay down debt
  • Start a savings account to cover monthly bills and expenses from 9-12 months

Invest $1,000

  • Follow save advice for investing $500
  • Invest in an exchange traded fund or buy individual shares
  • Purchase shares directly from a company through direct stock purchase plans (DSPPs
  • Open a mutual fund
  • Purchase government bonds or Treasury Bonds
  • Buy 100 shares of a stock priced at less than $10 or buy 50 shares of a stock priced at less than $20, etc.
  • Buy balanced index fund with at least 5% annual return

Invest $5,000
  • Open a 529 college savings plan
  • Open a low-to-medium-risk mutual fund
  • Invest maximum in a Roth IRA ($5,000 per year)
  • Buy municipal bonds with at least BBB rating

Invest $10,000
  • Follow same advice for investing $5,000
  • Buy a franchise
  • Invest in a profitable business
  • Start a business
  • Buy real estate

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