Your Next Tax Refund Might Be Larger — How to Invest It
According to the IRS, over 4.3 million people have received their tax refund as of Feb. 4, with an average refund check of $2,201 per person. This year, your tax refund might be higher than previous years with the addition of the second half of the child tax credit or recovery rebate credit from last year’s stimulus relief packages.
A refund of that size is substantial, and can be invested in several different ways to take advantage of high interest rates. Here are some tips to invest wisely. Important to note: having an emergency fund always takes priority over investing. It’s crucial to have money put away in case of emergencies before you begin investing. That being said, with inflation well over 7% and rising, keeping too much money in cash may not be an appealing prospect.
The same principle may pertain to debt payment vs. investing. Inflation is problematic in general, but far worse in comparison to high-yielding debt obligations. If you have debt obligations, any extra income — like a refund — should go directly towards paying off that debt. There is rarely an investment you can make that will outpace the interest rate on a credit card. The wisest thing you can do if you have high-interest debt is pay it off immediately before thinking of investing in anything else.
If you’ve paid down your debt and have a substantial emergency fund in place, the next step is maxing out qualified retirement accounts. Both traditional and Roth IRAs are good investments to make at around $2,000. If you invested $2,000 in an index fund with an assumed 7% annual rate of return over 25 years, you’d grow the account to nearly $10,000. The same goes for your 401(k). Qualified and tax-advantaged retirement accounts should be the first investment step one takes, as they are the only tax privileges afforded to taxpayers that are also attached to investments.
Outside of qualified retirement accounts, throwing $2,000 or so into exchange traded funds (ETFs) can be a good way to start an investment account. These are a basket of securities and can trade intra-day like stocks, allowing you diversified exposure.
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