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
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
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.