As the April 17 federal income tax filing deadline fast approaches, you might already be dreaming of ways to spend that refund check. What you should do with your tax refund depends on your financial goals and situation.
If you decide to invest your refund, there are many options available including stocks, bonds, mutual funds, interest-earning savings accounts and certificates of deposit. The choices can be overwhelming, but ultimately you want to know how much return you will receive for your deposit before picking an investment.
Here’s a five-step method you can use to help decide how to best invest your tax return.
PICK DIFFERENT INVESTMENT OPTIONS TO COMPARE
Whether you are considering an interest-earning savings account, a CD or some other option, it’s important that you choose at least two to get a complete comparison. You want to understand all your options.
DECIDE HOW MUCH TO INVEST
Consider if you want to invest only your estimated tax refund or put in additional cash. Of course, if you have the means, you might want to consider investing additional money to get more back in the long run.
Whichever you choose, the total will be the principal amount for your investment.
CALCULATE THE NUMBER OF PERIODS
Now you need to determine the number of periods that interest will be paid.
If the interest is being paid yearly, then the number of periods will be the number of years for the investment. For example, for a five-year CD that pays annual interest, the number of periods will be five.
If the interest is being paid more than once a year, multiply the number of years by the number of times interest is paid per year. For example, for a five-year CD that pays interest twice per year, the number of periods will be 10.
Note that if you are considering a savings account, then your number of periods would be the length of time you plan to keep the money in that account without withdrawing or adding funds.
CALCULATE THE VALUE OF YOUR INVESTMENT OPTIONS
It might seem intimidating, but you can actually calculate the future value of your investment options fairly easily by using an online financial calculator.
You can use any finance calculator, and you just need to input the number of periods for the deposit and the interest rate per year. The calculator will do the math.
The calculator will do the math for you.
COMPARE THE VALUE OF YOU INVESTMENT OPTIONS
In investing, it is important to understand your options before diving in head first. After calculating the amount of interest for different investment options of the same period, you can compare and decide how to best invest.
So before blowing your tax refund on a tropical vacation or fancy pair of shoes, and before sticking it away in a savings account that won’t accrue anything, consider turning it into an investment instead. Let your tax refund really work for you.
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