Financial experts say that steering tax refund cash toward savings is a great idea, especially if the money is used in disciplined and creative ways.
“We view tax refunds as yet another stream of after-tax free cash flow that should not be spent on consumption, and instead saved, invested, or protected in some form that generates returns, mitigates risk, and increases optionality,” Evan Paul, founder at Paul Advisory & Legal Group, told NTD News.
Invest in reliable investment funds
Paul recommends putting the refund money to work for our clients with strong balance sheets across broad asset classes. One of the best long-term compounding vehicles is to continue investing in the S&P 500 through an ETF (Exchange-Traded Fund). “Our preference would be to invest in the SPDR S&P 500 ETF Trust (SPY), which offers the S&P 500 Index and indirectly gives the investor access and liquidity to the U.S. large-cap market,” Paul said. “This vehicle is an efficient way to track the performance of the U.S. large-cap market and should continue to be a barometer of U.S. economic growth.”Build your emergency fund
If you don’t already have 3–6 months' worth of expenses in savings, now’s your time to set aside that money. “Keeping it in a high-yield savings account can help that money grow even further,” Elisabella Ricca, consumer analyst at TopCashback USA, told NTD News.High-yield bank accounts are an efficient, easy way to start saving right away, with solid interest rates.
Shave debt down, which can lead to more savings
A good tax refund savings strategy must also factor in debt, as many Americans have large credit card balances, some at 30 percent interest rates.“I’d eliminate the high-interest consumer debt, because that will end up saving you more money than any investment vehicle,” Max Hood, a financial adviser at MONETA, a wealth management firm, told NTD. “It’s a guaranteed return of whatever your interest rate is with no market risk.”
Don’t Make This Mistake With Your Tax Refund
People often make a big mistake with their income tax refund, but do not look at the money strategically. “Instead of viewing the refund as pay you had earned but didn’t realize you had, people act as though they found money,” Paul said. “As a result, they use the refund to buy things of little value in the long run, such as trips, big screen TVs, stereos, and new jewelry.Doing so means not putting the refund money towards your overall financial plan, which compounds the original mistake. “Most people don’t look at their balance sheet as a whole,” Paul said. “Thus, they may have high-interest debt and, at the same time, have cash on hand or be earning a less-than-optimal return on their investments. It’s economic inefficiency that is often avoidable.”