April 29, 2013 : Meg Favreau - Guest Contributor
How to Grow Your Nest Egg: 4 Ways to Invest Your Tax Refund
Ed Note: So you got a tax refund. What are you going to do with it? Wise Bread’s Meg Favreau suggests using it to grow your nest egg. Here’s how.
If there’s one thing that US Weekly, American Idol, and Joan Rivers have taught me, it’s that people love passing judgment on other people. We relish saddling our high horses, rolling our eyes, and peering down on others.
Like, for example, whenever we hear about a lottery winner who mismanaged his money and went broke. We wouldn’t do that, we say to our friends. We know better.
But the truth is that many of us do that very thing in a small-scale way every year, frittering away our tax refunds on things we don’t need. Now, don’t misunderstand me – I think using some of your tax refund to buy yourself something you want isn’t bad. After all, money is a tool that helps us do things we enjoy.
But whether it’s from the lottery or from our tax refund, using the majority of a windfall wisely can make a huge difference in our financial security. So, after you’ve bought yourself a little something, follow one of these ways to make the rest of that money work for you.
1. Deposit it in an IRA
When it comes to growing your retirement savings, there’s one piece of advice repeated over and over: start as soon as you can. Not only will you likely save more if you save for a longer period of time, but you also get to take advantage of the magic of compound interest — the money you save earns interest, and that money earns interest, and so on.
I know from personal experience that it can feel difficult to start saving for retirement or to increase your current savings level on a regular basis. Depositing your tax refund into an IRA can make you feel like you’re making some serious progress – and give you a big boost in savings down the line.
2. Deposit It in a Savings Account or CD
Unfortunately, savings rates are pretty low right now. But they aren’t nonexistent. Deposit your refund in a higher-interest-earning vehicle like the savings accounts from online banks Capital One 360 or Ally Bank, or a CD. If you’re concerned about having your funds locked up for too long in a single CD, try CD laddering.
3. Buy Savings Bonds
The interest rates on savings bonds are also somewhat low right now, but the rates are higher than most savings accounts and CDs. You can buy savings bonds directly with your tax refund, or from the U.S. Treasury at TreasuryDirect.
4. Start a Business
It’s a different type of investment – and perhaps the riskiest one at that – but if you’ve been thinking about starting a side business, consider using your tax refund as the seed money. It could be something as small as buying jewelry-making supplies to create goods to sell on Etsy, or you could sock your refund away in a savings account to help reach a larger business goal like opening a store or having a safety net to go freelance.
Feel like your tax refund is too small to make one of the investments above? It’s not. Every little bit you can save counts. And if you want more ideas, check out this piece on investments worth making with $50 or less.
Are you investing your tax refund? If so, what are you doing? Share your ideas in The Community.