What to do With Your Tax Refund

What to do With Your Tax Refund

While preparing and filing a tax return is one thing that most Americans agree is no fun, the silver lining for the stress and hassle of it is that many people will get a tax refund. Millennials may love the fact that they can get an extra boost of funds after filing a tax return. While your first impulse may be to splurge and treat yourself with your refund money, a smarter idea may be to save and invest this money. You may think that saving a few hundred or thousand dollars here and there would not have a huge impact on your financial future, but you may be surprised by what a difference this simple action can have on your life.

Investing the Money:

The average tax refund that Americans receive each year is approximately $3,000. This is enough for millennial’s to pay for a nice vacation, buy new living room furniture or splurge on a few nice electronics. These are all instant gratification items that offer little to no long-term benefits. On the other hand, investing the money can yield rich rewards over the course of a lifetime. Consider that $3,000 invested in popular stocks over the last ten years would have turned a tremendous profit. While only $30,000 would have been saved, this invested amount could have grown to more than $220,000 with a reasonable return. While this is certainly not enough to plan a very early retirement around, it is a life-changing amount of money that can yield financial security that many millennial’s otherwise do not have access to.

Paying Off Debts:

An alternative to investing the money is to use it to pay off debts. A common scenario for millennial’s involves being heavily in debt with student loans and credit card debt that they took on in college. This scenario is worsened by the fact that many young adults have trouble finding well-paying jobs in their field. Many millennial’s have tried to overcome these life obstacles by moving back in with their parents to get control over their finances. What happens if you use half of your $3,000 tax refund each year to pay down faster and the other half to invest? Your total nest egg may be smaller at the end of the ten-year period, but your debt balance would also be dramatically reduced or even wiped out. Remember that paying debt off early can reduce interest charges and ultimately help you to save money over the years.

Avoiding Speculative Actions:

Some millennial’s are inclined to view a tax refund as extra money that can be used for speculative investments, such as by purchasing cryptocurrencies or very high-risk stocks. In some cases, these types of investments may pay off. However, there is also a very high risk of loss related to speculative moves. The better financial option is to avoid speculation and consider debt reduction or less risky investments.

Splurging or treating yourself with your tax refund provides instant gratification, but the impact is short-lived. If you want to get lasting benefits that have considerable impact on your life, think about how your use of a tax refund could play a major role in your financial future.

Mark Angelo is a Co-Founder of Yorkville Advisors.

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