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.
This post is relevant for the following people:
I’ve argued in the past why some of you may not feel wealthier with stock markets at record highs, but that was 15% lower ago! The S&P 500 is poised to have one of its best risk adjusted returns in history if it closes above 1,800 (+27%) in 2013. Besides stocks, housing prices are up double digits for the nation. If you own stocks and real estate, you should be feeling richer right? Maybe, maybe not.
TO MAKE MONEY
Since first writing about my plans to invest more in 
Things sure felt great at the top of the market in 2007. Stocks were on fire. Real estate could do no wrong. Turning 30 was only slightly depressing for several days. I even remember being surprised at how little then President George Bush was making vs. a third year VP in finance. Then the bottom fell out of in 2008 as Bear Sterns and Lehman Brothers went buh-bye. Friends were getting fired left and right and all of a sudden nobody wanted to spend money anymore.
For those of you who bought SINA, BIDU, and RENN in May 2013 when I wrote “