In the article, “How To Get Over Your Fear Of Investing” I mention how your risk tolerance decreases the more capital you accumulate. When you were rocking a $100,000 net worth as a 30 year old, you had no problems investing 30% of your net worth in your employer’s promising stock. But now that you’re 50 and less enthusiastic about working for decades more, investing 30% of your $1 million nest egg doesn’t seem like a good idea.
The tax refund is a great example of how you can swing for the fences every single year for a bigger payoff, no matter your age or net worth. Given the average tax refund is only around $3,000, many people just blow it on things such as shoes, clothing, gadgets, and LED TVs. It’s not a bad idea to use your “bonus” money to buy something tangible, which can provide constant utility until the next refund. Going the traditional route of paying down debt or increasing a depleted emergency fund is just fine too, but unexciting.
If your tax refund was a whopping $100,000, I’m betting one’s approach to spending the refund would change. Some would unwisely go out and spend the money instantly on a luxury automobile, but I think most would think more responsibly on how to deploy such a large amount of money. Things such as paying down a mortgage, investing for retirement, buying a home, putting money away for a child’s education, and helping out a loved one all come to mind with this level of money. But most people will never receive such a large refund, so the point is moot. I just wanted to do a mental exercise to highlight how the different levels of money changes the way we spend.
Although a tax refund often feels like a nice windfall each year, it’s been our money all along. But how boring it is to just invest the money in the stock market for a potential 8% historical return. If you’ve got revolving credit card debt with interest rates in the teens or higher, certainly give that a whack. But as a Financial Samurai reader, I’m thinking you guys are savvier than this.