December 15, 2020
If you’re expecting a tax refund this year, consider yourself lucky. Refunds from the IRS are never a sure thing.
You might be dreaming up all sorts of things to do with the little extra cash that’s coming your way. Perhaps, a feel-good purchase or a fun vacation. Or…you could hold off on any new purchases and put that “free money” to work towards your financial goals.
The truth is we could always be saving more. And a tax refund provides an opportunity to stash more money away. Sure, we could give you the old refrain about making sure your emergency fund is in good shape. But we’re going to assume you’re a pro when it comes to saving for unexpected expenses.
So here are five other options you may want to think about when it comes to putting your tax refund to good use.
Just like you can never have too much money, you can never save too much for retirement. Retiring in comfort can be expensive!
If you’ve been an avid reader of our retirement savings articles (if not, why aren’t you?), then you know that you’re going to need anywhere between 80% to 100% of your pre-retirement income to maintain your standard of living when you’re not working anymore.
We understand that saving for retirement might fall off the radar when you have other more immediate expenses to tend to. But that’s why a tax refund can provide a great opportunity to show your retirement savings account some love.
Maybe you’ve already contributed all you can to your retirement account for the year. If that’s the case, wow! Go ahead and pat yourself on the back for being a responsible adult.
With that accomplishment in hand, we wouldn’t blame you if you’d rather treat yourself with the tax refund. But if you’re interested in looking for ways to put that extra cash to work, consider opening a certificate of deposit (CD).
CDs are a good way to boost your savings because they typically offer higher interest rates than a traditional savings account. There are also different CD strategies (e.g., CD ladder and CD barbell) that you can use to give yourself a little more flexibility when it comes to accessing your money.
If you’re planning to make some major purchases in the near term and don’t want to tie up your money in CDs, you might also consider putting your refund into a high-yield savings account.
These accounts typically enjoy a higher interest rate than a traditional savings account. This means you can really take advantage of the power of compound interest to help boost your savings while still being able to access your money quickly when you need it.
As you consider your options, pay attention to any minimum balance or minimum opening deposit requirements and account fees.
If you are looking for potentially higher returns and have a tolerance for risk, investing your tax refund could be worth a look. Common types of investments include stocks, bonds, money market mutual funds, and exchange-traded funds (ETFs).
Historically, investing in the stock market on average generates higher returns. But remember, there are no guarantees when it comes to investing. What happened historically may be different from what happens in the future.
Want to learn more about the difference between investing and saving? Check out our "saving vs. investing" article.
You may also consider using your tax refund to pay down your debt if you still have student loans or outstanding credit card balances hanging over you. Some experts recommend you tackle the loans with the highest interest rates first since higher-interest debt can be costly.
Remember, the quicker you pay off your debt, the sooner you can free up more money in your budget for something else.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.