SAVVY households can turn the average tax refund of $ 2,827 into over $ 100,000 by being money smart.
This is because 70% of all tax refunds for 2020 have so far been processed by the IRS, according to the National Taxpayer Advocate.
Yet many other taxpayers are still awaiting reimbursement due to a backlog created by the Covid pandemic.
The deadline for submitting your 2020 federal income tax return was May 17 of this year, after being extended to April 15.
Whether you’ve already had your tax refund or are still waiting for it, it might be worth investing it and leaving it alone for many years to come.
Of course, this is only suitable if you are not in debt or need to increase your emergency fund. If so, you must first use the tax refund for this.
How to start investing
BEFORE you invest, you should be aware of the risks, because unlike cash, what you save can go up as well as down.
This means you may end up with less than what you started with.
If your investment performs poorly, you are not protected against any loss by the Federal Deposit Insurance Corporation (FDIC).
This covers cash up to $ 250,000 per customer, financial institution and each category of account, such as savings accounts and checking accounts.
There are of course ways to reduce the risk of investing – for example, you can choose to invest in cheaper “passive funds” that follow the movement of various stock markets, such as the S&P 500 or S&P 100 indices. .
Investing in actively managed funds – which bundle different types of investments – is also less risky than simply investing in individual companies, called stocks.
This is because you are spreading your risk over a range of companies or other types of investment, such as bonds or real estate.
Robotic investing – where a computer determines what to invest in based on a questionnaire of your preferences – also carries less risk because it spreads your investments.
If you feel confident, you can start investing by setting up an account on an investment platform – a kind of supermarket of different investment products.
Just be sure to check the fees first – both for the platform and the individual investments themselves.
When in doubt, you should always seek advice from an appropriate financial advisor.
You should also keep in mind that making money by investing is not guaranteed and you could actually lose all the money you invested.
But if you can afford to lose the money, you could be rewarded with a pot of $ 105,497 if you leave the investment for 42 years.
This assumes that you will get a 9% annual return on investment through the S&P 500, which is a stock index of the 500 largest companies in the United States.
Over the past 10 years, the S&P 500 Index has actually generated an average annual return of 13.6%, according to data from Goldman Sachs.
However, there is no guarantee that this will continue in the future, so it is better to assume a more conservative return, such as 9%.
Over the past 140 years, 10-year stock returns have averaged 9.2%.
If you weren’t able to leave money for 42 years, investing it half the time would give you a pot of $ 17,629 if the return stays the same.
While not for everyone, it’s an example of how long-term investing can increase your pot through compound interest.
Nigel Green, chief executive of the deVere group, told The Sun: “No one can accurately predict the future.
“However, whether it is market stability or increasing volatility that awaits us, one message must be clear: keep investing.
“Why? Because economic history shows that over time the markets go up.
“For this reason, this age-old investment saying it’s just ‘time in the market, not synchronization of the market’ has led many investors to financial success.
“Very few people get enough money to have a financially secure future by saving on their own.
“The extra money should be ‘put to work’ through a sensible investment strategy.”
We explain in more detail how to invest in stocks.
Meanwhile, Suze Orman recently revealed that she has invested in Bitcoin – but also issued a cryptocurrency warning.
In addition, a few months ago she urged Americans not to invest their $ 1,400 stimulus check.