IBA Member Wadler Fleurin from NewVestor explains why and how you should invest your income tax refunds, bonus checks and other extra monies you weren’t expecting to build your wealth instead of spending it.
The 2020 tax filing season is upon us. For those who are expecting a refund check from Uncle Sam, this is a welcoming time of the year. For others who may owe the IRS, this is one of the more stressful time of the year. If you are one of millions of Americans expecting a refund check this year, you can brighten your financial future and stretch your refund money well beyond 2020. Here’s how.
The different ways to use your tax refund
There are many ways to use your tax refund, including setting up an emergency fund, making home improvements, donating to charity, shopping for new items, paying down debt, among others. Although these are all good uses of your tax refund, investing in yourself is a more optimal use of your tax refund. Here’s why and how.
Anyone who is not investing now is missing a tremendous opportunity.Carlos Slim
The best way to use your tax refund
Paying yourself for years to come is one of the best way to use your refund check. Specifically, we’re referring to taking all or a small portion and investing it to build sustainable wealth. Contrary to what many may think, investing does not require a lot of money. You can open and contribute to an IRA or brokerage account. The benefits of taking a small portion of your tax refund and investing it offers many benefits. For once, you are more likely to let that money grow if you park it in an investment account. Moreover, you give yourself an opportunity to start making periodic contributions to further grow your nest egg well beyond 2020. With so many investment vehicles out there, you may be asking yourself, “What securities should I invest my tax refund money in?” Grow Your Refund Check Beyond 2020
Investment options for your tax refund money
The options are numerous. Two popular investment options are stocks or mutual funds (index funds or exchange-traded funds). Stock-picking is challenging for even the experienced investor, let alone the rookie investor. Therefore, the beginner investor may prefer to forgo stocks for mutual funds for a host of reasons which are beyond the scope of this article. You can learn more about mutual funds here. For the investor who wants to keep things simple, index funds are very appealing. If you choose to go with an index fund, we recommend either a S&P 500 index fund or a total stock market index fund.
S&P 500 index funds vs total stock market index funds
A S&P 500 index fund is a fund that tracks the performance of the S&P 500 index. This is a stock market index that tracks the performance of the 500 largest companies that trade on the New York Stock Exchange. With a single mutual fund, you gain exposure to 500 large-cap corporations without having to buy each company stock individually. This gives you diversification, the process of spreading your money across multiple different companies to minimize risk. A few popular S&P 500 index funds include: Fidelity S&P 500 Index Fund (FXAIX); Vanguard 500 Index Fund (VFINX); Schwab S&P 500 Index Fund (SWPPX); T. Row Price Equity Index 500 Fund (PREIX). If you prefer to go beyond the 500 largest companies and get exposure to the entire U.S. stock market, a total stock market index fund will fit the bill.
A total stock market index fund allows you to invest in large-cap, mid-cap, small-cap U.S companies. With a single, low-cost fund, you are able to invest in thousands of companies. A few popular total stock market index funds that you could consider for your tax refund money include: Fidelity Total Market Index Fund (FSKAX); Vanguard Total Stock Market Index Fund (VTSMX); Schwab Total Stock Market Index Fund (SWTSX).
The bottom line
Investing all or even a small portion of your 2020 tax refund allows to you stretch your money beyond 2020. This is a brilliant way to reward yourself and build long-lasting and sustainable wealth. If you are a novice investor, you can go with either a S&P 500 index fund or a total stock market index fund. Both offer diversification and are incredibly cheap.
About the Author
New Vestor‘s mission is to empower people to become investors and start building wealth. We provide investment knowledge that will give people the confidence to start investing and building a better financial future.