How to Not Blow Your Income Tax Refund
$2,833. That’s the average income tax refund from the IRS this year as of April 5.
It’s a few percentage points down from last year’s average, but it’s still a big chunk of change. And you can turn it into an even bigger chunk of change by investing it responsibly.
Of course, $2,833 means different things to different people. Your risk tolerance, savings level, and employment situation can (and should) influence your decision on what to do with it.
With that in mind, we’ve put together three common-sense plans for what to do with your income tax refund this year.
An Instant Emergency Fund
Let’s start with one of the bare necessities of personal finance.
Many financial planners advocate keeping three to six months’ worth of expenses in a savings account. Living without this money “cushion” can leave you vulnerable to financial ruin from an unexpected job loss, car breakdown or medical problem.
Yet one-quarter of Americans have zero emergency savings. And tens of millions more Americans have an inadequate amount. Odds are, some of them are reading this article right now.
If you have a small or nonexistent emergency fund, there’s no need to feel ashamed. After all, your income tax refund could be an easy way to start or replenish one.
Most savings accounts are pretty boring places to park your money. They don’t grow or generate income; they just sit there. And that’s okay for your emergency fund. Its purpose is to be easily accessible in case of emergency, not to earn a return.
Having said that, there are a few high-yield savings accounts out there that can generate modest returns while still providing liquidity and FDIC coverage.
A Head Start for Your Retirement Savings
Maybe you already have some emergency savings, but what about retirement savings?
Almost half of Americans have less than $10,000 saved for their golden years, and 14% have no retirement savings at all. That’s almost as concerning as not having an emergency fund.
Social Security is a program with an uncertain future. And even in its current state, it doesn’t provide anything near a living wage. Plus, the average senior citizen spends about $46,000 a year — almost three times the average Social Security payout of $16,464 a year.
If you don’t have a 401(k) or IRA, your income tax refund might provide a great opportunity to open one. The average 2018 refund of $2,833 is big enough to satisfy most IRA investment minimums. In fact, it’s enough to build a complete — albeit simple — portfolio.
A three-fund portfolio, also known as a “lazy portfolio,” is a time-tested allocation for people who need a cheap, easy-to-maintain IRA investment strategy that just works. It’s about as simple as you can get — just an even one-third–one-third–one-third mix of three exchange-traded funds (ETFs).
One should be a domestic stock index ETF like the Vanguard S&P 500 ETF (NYSE: VOO), one should be a foreign stock index ETF like the Vanguard FTSE All-World Ex-US ETF (NYSE: VEU), and one should be a domestic bond index ETF like the Vanguard Total Bond Market ETF (NASDAQ: BND).
Maintaining this strategy is almost as easy as building it. Once a year, you simply rebalance the portfolio back to its original one-third–one-third–one-third allocation by selling some of your shares in the best-performing funds and reinvesting the proceeds into the worst-performing funds.
This simple strategy returns a respectable 6% to 7% a year on average. That’s better than nothing — it beats inflation, and it could grow your $2,833 income tax refund into more than $5,000 over the course of a decade. But it’s not as lucrative as our next refund idea...
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It contains full details on why dividends are an amazing tool for growing your wealth.
Turn Your Income Tax Refund into a Cash Cow Through Stock Selection
As Warren Buffett once said, “Wide diversification is only required when investors do not understand what they are doing.”
That’s not to say that wide diversification — as in the passive investing strategy outlined in the previous section — is bad. Lots of investors don’t understand what they are doing. For them, a generic, index-based strategy really is the best move, and there’s no shame in that.
But investors who do understand what they’re doing can earn superior returns through careful stock selection.
Wealth Daily contributor and Technology and Opportunity editor Jason Stutman is one who understands what he's doing. His Technology and Opportunity subscribers netted a gain of more than 140% on Envision Solar (NASDAQ: EVSI) in less than eight months.
That could have turned your $2,833 tax refund into more than $6,900 — in a single trade in less than eight months.
Granted, it’s hard to find opportunities like these on your own. But you don’t have to. You can get Jason to do it for you.
A Technology and Opportunity subscription costs less than one-tenth of the average 2018 income tax refund. And that cost may even be tax-deductible if you’re trading within an LLC and claiming it as a business expense.
Of the three income tax refund investment strategies we’ve profiled today, this one is by far the most lucrative. Click here to learn more.
Until next time,
Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.
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