How to invest your tax refund so it feels like splurging
The easiest money to fritter away is the 鈥渆xpected windfall,鈥� otherwise known during this time of year as 鈥渢he tax refund.鈥�
Who can blame us for mentally spending our money five times over听during those 21 idle days the IRS says it takes to process electronically filed returns and send听refund checks?听That鈥檚 three whole weeks to obsessively click 鈥溾�� and rearrange the furniture听to see how a new 72-inch flat-screen TV might affect the living room鈥檚 feng shui.
Good intentions, so-so follow-through
Plenty of strong-willed taxpayers swear they鈥檙e going to do 鈥渢he right thing鈥� with their tax refunds. In fact, in response to a new听, 54% of folks who expect to get a refund said they plan to save or invest the money. And some of them actually will!
When asked if they had followed through with their intentions last year, 41% of taxpayers who got money back from the IRS said they really did take the financial high ground and either saved or invested their refund.
That鈥檚 great 鈥� but it appears that our resolve is growing weaker.
Among those who expect a refund in 2016, more people than last year say they should use it for a听splurge 鈥� 34% want to spend it on a vacation, home improvements or at the mall, compared with 31% who received a refund last year and say they spent it on retail therapy.听Clearly the much more fun 鈥渟pend it鈥� trend is getting some good PR.
A duffel bag filled with cash has been left on your听doorstep 鈥�
That sounds a lot more exciting than, 鈥淵our tax refund will be directly deposited into your account in the next three weeks.鈥� Yet that鈥檚 not how tax-season information and advice is typically delivered. Instead, we get the eat-your-peas-and-carrots spiel:
- 70% of taxpayers will receive a refund in 2016, according to the IRS.
- In 2015, the average income tax refund was $2,797; expect this year鈥檚 average refund to be in the same ballpark.
- For those who carry credit card balances month to month,听is probably the best use of tax refund dollars.
- After that, direct money toward building an adequate听.
- If you鈥檝e got a big-ticket expense coming up soon (e.g. a new car, home improvements, vacation), set aside refund money in a听until you need it.
No, really, take that duffel bag of cash 鈥�
C鈥檓on: There鈥檚 plenty of juicy material buried in those dry bullet points above 鈥� if you know how to spin it in a way that may actually inspire people to save and invest their tax refunds.听How about:
Seven out of 10 of you reading this article will soon have a pile of money 鈥斕齛n average of nearly $3 Gs per person 鈥斕齞rop into your lap. You know what to do with it: Pay off those thugs who鈥檝e been shaking you down for monthly payola, buy reinforced locks for your safe room and peel off a handful of hundred-dollar bills for听those capers you plan to carry out later this year.
When you put it that way, paying off debt and boosting your savings sounds a lot more exciting than, well, paying off debt and boosting your savings.
But what about the 7% of taxpayers NerdWallet surveyed who expect to receive a tax refund and said they plan to invest the money in the stock market? Hooray for them! We鈥檙e keeping our fingers crossed.
Invest it in the stock market? Now? Are you kidding me?
We certainly hope for 100% follow-through from those who pinky-swear they鈥檙e going to invest some of the money from their income tax refund in stocks for the long haul. (Last year 5% of taxpayers who got a refund actually did.)
Given the market鈥檚 recent bumpy ride, it鈥檚 understandable if you鈥檙e听a tad reluctant to make good on that promise.
Now鈥檚 a good time to remind everyone that historical data shows that short-term market dips are just that: short-lived. Temporary market dips are only financially devastating听if you鈥檝e invested money that you need in the near-term (at a minimum, in the next three to five years). When the market roars back to life,听as听it always does, you want your tax refund windfall to be already invested.
As for finding the resolve to go from 鈥渟hould invest my tax refund鈥� to 鈥渄id invest my tax refund,鈥� we鈥檝e got a few ideas on how to make the idea so palatable that you actually follow through:
Say, 鈥淚n your face, you can鈥檛 touch this!鈥� to the IRS:听Not to anyone鈥檚 actual face, of course. That鈥檚 just rude. But you can keep the tax man on the other side of the velvet ropes legally by shielding earnings on your tax refund from a future tax hit by opening a听.
Compare yourself to famous investors:听When conversations inevitably turn to stock market volatility (even if you鈥檙e the one who has to raise the topic) turn knowingly to your pals and mention there鈥檚 this guy named Warren Buffett who, like you, is no sissy sitting on the sidelines when the stock market drags down solid companies for no fundamental reason. For investors like the two of you, stocks are on sale! Then quote his famous line from one of his听, 鈥淏e fearful when others are greedy and greedy only when others are fearful.鈥�
Put a robot wealth manager on your payroll:听鈥淗ave I told you about听, my wealth manager?鈥� You can totally say that with a straight face and mean it when you hire a robo-advisor to manage your portfolio.听听automatically invest your money using sophisticated algorithms. Many even double as your robot CPA, making maneuvers to help cut down taxes. With low initial investment requirements ($0 at听听and $500 at, NerdWallet鈥檚 top robo-advisor picks overall), it鈥檚 a no-brainer way to invest.
Bask in your brilliant diversification strategy:听As a newly minted thousandaire (thanks, Uncle Sam) you can instantly spread the wealth around 鈥斕齛cross asset classes, industries and various indexes 鈥斕齜y investing in听听(ETFs). Like mutual funds, ETFs contain a bundle of multiple investments. But they trade like stocks and are known for their very low fees. That means that, without a lot of money up front, you can build a highly diversified low-cost portfolio and sleep well at night,thankyouverymuch.
Buy shares of stock in a showy way:听Is there a publicly traded company that you鈥檝e been dying to own a piece of? There鈥檚 no better way to announce your intentions than by stopping in the middle of a sentence while you鈥檙e fiddling with your phone and excusing yourself from the table to 鈥減ick up a few shares of XYZPDQ.鈥� Don鈥檛 walk too far out of earshot; otherwise you鈥檒l miss out on the best part: Pretending to bark orders at your stockbroker when you鈥檙e actually just placing trades via your听鈥檚 mobile app.
See? Doing the responsible thing and investing your tax refund doesn鈥檛 have to be a drag.
Dayana Yochim is a staff writer at NerdWallet, a personal finance websit. Email:听dyochim@nerdwallet.com.听Twitter:听.
This article first appeared in 听
