Investing your tax refund is a smart way to reach your financial goals. But depending on what you want to achieve, investment styles may differ.
3 Ways to Invest Your Tax Refund
Tax time is around the corner, which means many people are going to be sitting on a windfall thanks to Uncle Sam. While the knee-jerk reaction is to cash that check and spend it, a smarter option is to invest it.
But before you can begin investing it, you need to figure out your goals. For example, are you investing with an eye toward a big purchase like a home or car, or are you socking it away for retirement or for a college education? Or maybe you can create an emergency fund. Either way, your goals are going to dictate your investment style, which is why you need to first figure out what you want to do with your tax refund.
Short-term Goals Mean Your Investment Needs to Be Protected
For investors who are saving for the purchase of a home or a car, the idea is to see your money grow but at the same time keep it protected. After all, you don’t want to lose your entire down payment because you chose to invest in a high-flying stock that imploded. If homeownership is around the corner, you want to be more conservative in terms of where you put your tax refund. Safe bet for your tax return: invest the money in CDsor short-term fixed income. That will help you protect your principal and hopefully get enough growth to offset inflation. (Read more, here: Using time Horizons In Investing.)
Investors who want to use their tax refund to create an emergency savings account also have options. Just like with near-term purchases, investors are going to want to protect their initial investment but they also need it to grow, at least at the rate of inflation. In addition, they need the money to be easily accessible in case there is an emergency, which means it’s not a good idea to lock it up in an investment that has a long duration or that will hit you with fees if you exit out of it early. CDs and savings are often a good place to park the money, but in a low interest rate environment they may not give you enough yield to keep up with inflation. A low-cost mutual fund or electronic traded fund that isn’t invested in risky things could be a way to go. (Read more, here: 10 Tips For The Successful Long-Term Investor.)