How to invest your tax refund
- If you're building an emergency fund, save in an FDIC-insured account.
- If you're saving for a down payment on a house, consider getting a CD.
- For long-term goals, a target-date fund may be appropriate.
Whether it's $500 or $5,000, a tax refund represents the biggest chunk of money that most taxpayers stumble over in a year. Obviously, a big windfall like that just begs to be tucked into a smart investment.
Many people are heeding the call. Three out of 10 Americans (28 percent) expect to save or invest their tax refund, according to Bankrate's new poll .
How you invest your windfall will be determined by your goals and the amount of time the money will be invested. Risk tolerance plays a part in the decision, too.
First you have to determine what you're investing for:
- A rainy day.
- A large purchase in the near to mid-term future.
- Retirement -- or something else so far in the future that you can barely contemplate it.
"There is the potential to accomplish multiple goals with that refund. You can use some to boost emergency savings as well as jump-starting your retirement savings," says Greg McBride, Bankrate.com's senior financial analyst.
Emergency fund investing
An emergency fund should be, above everything else, easily accessible.
"What you need
is money you can get to at any point, where there is no risk of loss and where you can earn a return that outpaces inflation so that the $1,000 you put away today is still worth $1,000 when you need it," McBride says.
The best places to park an emergency fund are high-yield bank savings accounts and money market deposit accounts.
"They accomplish all those goals -- money you can get to, it's FDIC-insured and, by seeking out top-yielding accounts, you preserve that buying power by staying ahead of inflation," McBride says.
Near to mid-term goals
Five years is an unwieldy interval when it comes to investing -- it's not quite short-term enough to just park money in a savings account and not long-term enough to assume the risk of aggressive investing.
Investing in this range can be tricky because "you have to be much more conservative," says McBride.
One mid-term goal might be saving for a down payment on a home.
For this time horizon, investors should look for "low or no-risk investments, where you have access to the money at the point when you need it," McBride says.
CDs and other fixed-income investments can be a good starting point. With years until the money may be needed, investors can afford to tie up the money for a period of time in return for a higher interest rate.Source: www.bankrate.com