If you’re expecting to get a tax refund this year, you may already have plans for what you want to do with it. I’m not here to change your mind. But I do have an idea for your consideration: use your refund as an investment.
Am I telling you to put it away for retirement? Well, that’s certainly one possibility. When you invest in financial assets that will produce income or grow in value, that pays off in the long run. If you are 30 years old, and invest $1,000 of your refund in a retirement account that earns an average of 8% annually, you will have nearly $15,000 at age 65, just from that one deposit. That’s a nice payoff. But financial assets are only one way to get a payoff from your money.
Let’s think of an investment as anything that over time produces value greater than the original cost – that is, anything that can be compared to planting a seed and seeing it grow.
As I see it, some purchases can be investments. Buying a new or different car? Maybe. If you’re buying a car because you don’t like the color of the old one or you want a better sound system, I would not see that as an investment. It doesn’t provide any long-term payoff. But if you’re buying a car that is necessary so you can commute to a new job, that’s an investment. It will pay off because it enables you to earn money at the job.
Likewise, a new computer could be an investment if it is going to be used to further your education, but if you’ll mainly use it to surf the web and pay games, then it may just be an expense… no long-term payoff.
If you’re buying experiences, you can also evaluate the payoff. Some experiences will provide a greater payoff than others. Some people plan a family outing each year with part of their tax refund. Most family outings will have some short-term payoff, providing family bonding time and enjoyment. But some outings provide greater long-term payoff. If your children have never seen a live play on stage, then taking them to a community theater production might have greater long-term payoff (expanding their cultural awareness) than going to a movie that’s a lot like the other movies they’ve seen.
Paying debts is a common use of tax refund money. It provides an immediate payoff, and some larger payoff too if it saves money in interest or means you won’t get evicted. I suggest, though, that you take debt payoff a step farther and invest in financial security by setting up an emergency savings account that will prevent you from being in debt when tax time rolls around next year.
How will you invest part of your tax refund this year? ~Barb