To many people, an income tax
refund might be one of the largest single cash receipts for the entire year.
Avoid the temptation to spend your refund on consumption items. There are several
places you can invest the refund to enhance your long-term financial goals. You
can pay off current debt, invest in the stock market, make home improvements,
or invest in a pension plan for retirement.
Let's assume you will be getting a
$5,000 tax refund. The best return on your investment may well be to pay off
current amounts you owe that have high interest rates. If you are carrying a
credit card balance at 15% interest, a reduction in the balance is the
equivalent of earning a 15% return on your money. Your $5,000 payment will save
you $750 in interest expense over the next year. This is an outstanding return
when compared to most other investments. If you leave the $5,000 balance on the
credit card and make only the minimum monthly payment, you can pay up to twice
that amount in interest, depending on your interest rate.
A second choice might be to pay
down the principal balance on your home mortgage. A $5,000 reduction in a 4%
thirty-year loan will save $11,000 in interest expense over the life of the
loan.
Consider putting the cash into your
retirement program. Only one out of five Americans can retire with adequate
resources to live independently. $5,000 invested at a 6% compounding return
will be worth $28,000 in thirty years. Your retirement fund could grow to
almost $450,000 if you invest $5,000 each year for thirty years at a 6%
compounding return. Have you ever heard anyone say that they retired with too
much money?
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