Is it better to save, spend, or invest your tax refund?
The days are getting longer, the leaves are returning to the trees, summer is just around the corner and—unfortunately—the IRS is knocking at your door.
When T.S Eliot wrote, “April is the cruellest month”, he must surely have been talking about the yearly scramble to file your taxes.
Sane people will try to avoid the humdrum of filing taxes as much as possible, but, as long-term investors, we’re always on the lookout for opportunity in some of the more monotonous parts of life.
And what’s the big opportunity that comes with tax season? Tax refunds!
According to the IRS, the average tax refund for a U.S. worker has been roughly $3,000 per year over the past 10 years. Not an insignificant amount of money, I’m sure you’ll agree.
However, the findings of a recent survey by GoBankingRates suggests that about 43% of Americans that receive a tax refund simply put it into savings. Another 36% use this lump sum to pay off debts or loans.
These are valid uses for this money, of course, especially compared to the 16% who said that they just use the money for a vacation or some other splurge.
But remember, this isn’t free money that the government is handing out. This is money that you’ve already earned—money you’ve worked hard for.
So why not get it working for you?
What if you invested your tax refund?
We decided to do a little experiment.
We picked three of the most commonly purchased companies in our Invest app—Amazon, Apple, and Netflix—to see what the average worker would have earned if they had invested their tax returns into them over the past 10 years.
To do this, we created an imaginary investor named Jessie.
Since 2008, Jessie has received the average tax refund of $3,000 per year from the IRS. Because Jessie is an organized person, they file their taxes as early as possible and already have their tax refund reclaimed by February 13th.
On this day every year, Jessie invests their refund in equal parts (made possible by fractional shares) into Amazon, Apple, and Netflix stock.
Jessie doesn’t wait for dips in the market or pay any attention to the latest news stories. Jessie simply puts $1,000 into each company on the same day every year.
Not exactly ‘Wolf of Wall Street’ stuff.
So, after 10 years of consistently investing their tax refund into these three popular companies, what has Jessie’s overall investment of $30,000 grown to?
Yes, you read that right. That’s almost $190,000 in profit, which is an awful lot more than you’d get with your regular savings account.
In fact, this return even beats the performance of the overall market in general, with the S&P 500 returning a not-too-shabby $52,800 (or $22,800 in profit) for the same period.
Missed the boat?
That’s all well and good for Jessie you might say, but why didn’t you tell me this ten years ago?
The point of this exercise is not to show you what could have been—it’s to show you what could be once you take advantage of the compounding power of long-term investing.
Of course, Jessie benefitted from a protracted bull market. And yes, the trio of Amazon, Apple, and Netflix are exceptionally good stocks to pick.
But hindsight is a powerful bias.
In 2008, none of these companies were the giants they are today. Netflix only had a share price of about $5, while Apple’s was about $14 and Amazon’s around the $60 mark. The world in 2008 was still in the midst of the Financial Crisis too, and many of the ‘experts’ at the time would have called you crazy for investing in the market with such volatility.
The important thing to recognize is the immense power you can unlock by putting excess finances into instruments that will actually make it work for you.
You don’t require a degree in finance or some complicated formula to pick the best time to invest. All you need is belief in the companies you are investing in, some cash you want to make work for you, and a few years to let your investments grow.
Remember, time in the market beats timing the market… every time.
Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions Amazon, Apple, and Netflix.