Investing you tax refund instead of spending it is recommended. If you want to achieve financial freedom, it's not enough to aggressively save most of your income. You must also wisely invest as well.
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 ideal financial scenario once you reach financial independence is low volatility, steady returns! One you've won the game, you shouldn't play as aggressively.
Investing Your Tax Refund
The tax refund actually provides for a great opportunity to swing for the ROI fences every single year, no matter your age or net worth. Given that the average tax refund is only around $3,000, many people just blow it on material things like shoes, clothing, gadgets, and LED TVs.
It's not necessarily a bad idea to use your “bonus” money to buy something tangible: any of these things can provide solid utility until next year's refund. Alternatively, going the traditional route of paying down debt or increasing a depleted emergency fund is also fine, just terribly unexciting.
Now if your tax refund was a whopping $100,000, I'm willing to be that your approach to spending it would be substantially different!
Some would unwisely go out and spend the money instantly on a luxury automobile. Most, however, would probably give considerably more thought to the question of how to deploy such a large sum.
Be Responsible With Your Tax Refund
Things like paying down a mortgage, investing for retirement, buying a home, putting money away for a child's education, or 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 (sorry!). The $100k refund simply provides a mental exercise that highlights how our spending habits shift when dealing with different levels of money.
Although a tax refund often feels like a nice windfall each year, it's actually been your money all along. And how boring it is to just invest that money (now that you finally have it) in the stock market for a potential 8% historical return.
Of course 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.
A 10X Return On Your Money By Investing Your Tax Refund
Please spend some time reading, “Revenge Spending: A Way To Get Back At Life” Each of the ways I suggest provides a return ranging from 1,000% to priceless, in my opinion.
While you probably can afford to take bigger risks with $3,000, my suggestions for investing your tax refund probably have the lowest risk of all—and definitely the biggest payoff!
Use your refund to build better relationships at work and at home. If work is going well and your love life is swell, everything else just takes care of itself. All this talk about aggressively investing your savings into stocks and bonds for a more secure financial future is just gravy, because you're living in a wonderful moment.
Best Way To Spend Your Tax Refund
When was the last time you took your boss out for lunch (on you)? I bet for many people, the answer is “never”. But as I've highlighted before in, “How To Get Ahead In Your Career” that's exactly what some of the most keen people in any organization do.
If you could pave your path to a promotion and a raise, the return on a fancy $100 lunch or multiple lunches with your boss is probably closer to 10,000% instead of just 1,000%.
The happiest moments in my life are when I'm surrounded by family, friends, and loved ones. Think back to those family holiday get togethers, or those great adventure vacations with your partner. What a blast!
How about those momentous occasions when your parents proudly watched you graduate from high school or college? These are moments I'll never forget. It's curious how we drift apart as we get older; life gets in the way, I guess. Spending money to be with friends and family can't be beat.
Tax Refund Investing And Spending Plan
My refund this year is relatively large because of deferred compensation that is paid in a lump sum once a year while no longer having a lump some severance payment. The IRS thinks the lump sum will occur every month, and therefore taxes the amount at the top tax bracket. The reality is I earned much less to the point where AMT was only a couple thousand dollars. One day I hope AMT will be zero, if Congress can raise the income trap.
I see the annual tax refund as a defined pool of money that should be wisely spent on others as well as yourself. If you throw the refund into your pool of investments, its efficacy disappears. You won't even be able to feel the joy of a 10% return. But if you invest the refund on relationships, a better life awaits.
Recommendation To Build Wealth
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After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Invest Your Tax Refund In Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
About the Author:
Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He's currently focused on investing in real estate crowdfunding to take advantage of lower valuations and higher net rental yields in the heartland of America. Sam spends time playing tennis, taking care of his family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
25 thoughts on “Investing Your Tax Refund For A 1,000% Return”
The problem with all of these “solutions” to a tax refund assume that the refund is some sort of bonus. It’s not. It’s your money that you’ve already earned. You just let someone borrow it interest free for a while. Before thinking of how to blow it, you should kick yourself in the butt for letting anyone borrow your hard earned money for free, especially while you are still working. If you are no longer working and have enough money to live on plus let others borrow some for free, by all means you should at that point.
I do like the non-traditional investment approach that most don’t think of though. The problem it is it practically all risk since there is no “data” on whether your boss will suddenly like you much more and give you a raise or continue to like you. Being a “suck up” might also weaken your relationship with certain colleagues even if it strengthens your relationship with your boss.
I address this your money thing here, “Although a tax refund often feels like a nice windfall each year, it’s actually been your money all along. And how boring it is to just invest that money (now that you finally have it) in the stock market for a potential 8% historical return. Of course 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.”
The average money market interest rate is less than 0.2%. I’d much rather have every single American get a tax refund than owe because Americans have shown they can’t save (less than 5% national savings rate).
You’ll just have to trust me on spending money investing in relationships Ricky. They pay off BIG TIME in the end if you do it properly. Care to share your financial stats and career so I can get more perspective on your cynicism? Thx
But what’s wrong with a historical 8% return? “Now that you finally have it” is where I see the disconnection. You could of had it all along if you had only done the research and had been prudent about your taxes all year (I am not directing this towards you, the writer, but towards those who are oblivious to the gov borrowing their money for free).
Don’t get me wrong, I 100% believe in networking and strengthening relationships with your loved ones as well as business relationships. I am just saying it isn’t as quantitative as an 8% return. I was simply pointing out that by strengthening some relationships you can diminish others concurrently.
As far as stats, I’m not sure what you’re looking for :P I am nearly FI and have made most of my money working for myself. I currently work part time at a local cell retailer because I am finishing up school this semester and did not enjoy computer consulting anymore. I have no student debt or any debt of any kind. My savings rate is nearly 80%. I haven’t started a traditional career yet where there is actually room for growth so it suppose that’s what caused me to make a rash judgment.
Because 1,000% is greater than 8%.
Nice job becoming FI while still in school. You’ll have to share how you did that.
I think if you had a traditional career, think your appreciate more my advice.
We almost never get a tax refund, and it’s no different this year. We plan our tax withholding so that we will owe a little bit to the Fed and State come April. I would rather have the use of my own money throughout the year than give the government a loan by paying too much tax.
For me, Vanguard VTSAX 100% deposit into a taxable account. I’m 45, but my 401k size is under par currently; so I started saving into a Spousal IRA and a ROTH IRA for me (now all 3 fully funded)… to ensure I have a safety net or some cushion, I created a taxable account and it primarily has VTSAX in it….
Outside of that, I would increase my cash position in Cap One 360… This account allows me to have piece of mind….
Sure wish I was following blogs like this sooner… Once I’m caught up, I have different thoughts about how I will spend money…
Sounds good Steve. Welcome to my site! Good luck and enjoy the journey towards a healthier retirement! Sam
I am expecting a small refund ($3-500)! I expect to add to our investments.
Nooooooooo! A $300-$500 refund is perfect for spending it on someone you care about! The point of my article! Investing $300-$500 in your investments won’t do anything!
This year the money is going towards the next goal – replacing our 2-door 1999 Hyundai Tiburon. Our kids are (almost) 8 and 9 now, and don’t fit too well. I’m actually not sure I’ve EVER fit very well in that car.
And yes, did our own taxes once again. We’ve never paid for our taxes to be prepared.
What? You don’t get $100k refunds, Sam? Surely you must know some tip, trick, or strategy to accomplish getting one that massive ;-)
I’m among the “boring” types of people. The refund (which is usually on the small side since I don’t care to give the government a free loan) hits my account via direct deposit and I pretty much just treat it as a paycheck. In other words, it becomes a regular part of our cash flow…no different than say a year-end bonus would (and those bonuses are usually just as small as a tax refund!).
Ahhh, yes that is boring, but that’s OK. Because I am boring basically every month w/ my money (50%+ saver still), I like to use the tax refund to invest in things I perhaps wouldn’t normally do. The main thing really is spending the money on others.
I hope to one day make millions to one day be able to get a $100K refund!
I’m going to open an account at Vanguard and invest it all in a fund. I have an IRA and 401K, but nothing yet to help support me when I decide to be FI before retirement age. It’s a small step but important nonetheless and I’m happy to be able to do this.
Not a bad move. Small steps become bigger steps. But if you have nothing at this stage, I’m assuming you are younger. Might as well use some of the money to take out colleagues and find yourself a mentor for some huge gains down the road!
A clever approach, Sam. The logical side of me wants to say that money is fungible, so a tax refund should be applied like any other money. But I know there are benefits to mental accounting, too. Buying happiness is almost never a bad idea: if a separate bucket allows you to do so, then great.
We’re discussing what to do with our $700 return, so this is a timely post. Thanks for the perspective!
No tax refund this year. Owe about $1,000. Not to bad, I knew I would owe a little. Unfortunately, can’t take real estate losses due to $150,000 threshold.
I haven’t done my taxes yet, but expect to get a modest refund thanks to the mortgage interest deduction. Normally I just throw my refund into savings or my brokerage account, but this year I have a feeling it’ll be going towards wedding expenses.
We are getting a pretty big refund this year, mainly due to the fact that I overpaid on my estimated taxes and the huge loss we took on our rental properties in 2013. We are going to invest about 80% and use the rest for our upcoming vacation.
10k tax refund + some $15k and buy TSLA.
great article! Not only will taking out your boss to lunch make a great impression on him. But it may lead to a friendship and having friends in high places is a great way to get ahead.
Usually I owe but in 2013 I overpaid by more than you did. I’m letting the IRS roll it into next year, I’ve taken a few capital gains in 2014 (mostly not by choice) so it’ll come in handy to avoid a penalty next year. As for “interest free loans”, my bank 1099 shows a balance like this earns maybe a Big Mac in a year.
Whenever I get down, self critical or fed up…. I turn my attention to others. It never fails, giving to others and getting out of my head is a sure fire path to wealth.
No refund due. We hate for the government to have interest free use of our money which they mostly waste. So we plan and schedule withholding and estimated payments to either get no refund and have a zero balance due, or we owe. As long as we avoid the underpayment penalty, owing is fine with use.
I don’t think I’m going to get a big return. If it we do, it’s going to fund our IRAs or brokerage accounts. Something boring, but that adds value. Last year we used our hefty return to fund our down payment. It was awesome!
Raise the AMT threshold and give up “free money”? Congress won’t be making moves like that since AMT affects the wealthier more than anyone else. As you say yourself, don’t go against the masses!
As for my refund, I rarely get them. I tend to schedule my withholdings and tax payments so I owe between $500 and a $1,000 per year. I prefer not to be in the business of giving out interest free loans for a year.