The job market remains rocky in parts of the U.S., and many consumers are
reluctant to spend lavishly after some lean years.
For many Americans, this year's tax refund will go toward paying down bills or
be deposited into savings, where it will stay until a rainy day.
But a decent tax refund can be more than a quick fix to household finances.
If you want to retire with some degree of comfort, it's crucial to put your
savings to work if you can, and build a decent nest egg.
Keep in mind that if you get a modest 5% rate of return each year, $2,500 today
turns into almost $8,500 in 25 years, more than tripling your savings.
If you find a way to invest an additional $2,500 every year, you'll be sitting
on more than $133,000 in 25 years.
That's the power of compound interest over time: You make a little bit of money
on your investment, then reinvest those returns, which can grow your savings
substantially over the long haul.
If you can't find a way to scrape together the cash, a tax refund is a great
chance to get the ball rolling. A check of $1,000 or more from the IRS can
provide a great springboard to retirement savings.
Here are a few long-term investing ideas to try to generate a decent return on
that 2012 tax refund.
Divert it to your 401(k)
Technically, you can't deposit money that doesn't come through your employer
into a 401(k). But there is a work-around if you talk to your benefits
coordinator. Use your refund for living expenses, as you would a paycheck, and
have the same sum shunted into your 401(k) plan from your pay.
Here's an example: You take home $1,200 a month after taxes and health
insurance. Your refund is $2,400. For two months, you'll live off the refund
while your paycheck is diverted to your 401(k). After two months, it goes back
to normal.
If you have the discipline to make this work, it's a great savings tool. It's a
little more paperwork, but benefits managers might be happy to work this out
with you.
Buy low-cost funds in an IRA
If you don't have a 401(k), starting a similar program on your own via an IRA is
easy, and it comes with a tax deduction worth up to $5,000.
An IRA, or individual retirement account, gives you access to a broader range of
investments. That may sound intimidating, but don't fret; the simplest options
are often the best for long-term investors.
Those options include low-cost index funds that mirror a broad-based benchmark
such as the S&P 500 index. You'll have built-in diversification for stability
without managing a complicated portfolio.
One place to start might be an S&P 500 ETF, which spreads your money across the
components of the S&P 500, some of the biggest corporations in America, such as
Walmart, Google and Ford. Such funds are a good value, too, costing as little as
$1 a year for every $2,000 you've invested.
If you're intimidated, why mess around with researching lots of other
investments when you can hold a piece of 500 different stocks for a dollar a
year?
It takes out the guesswork, and protects you, because if one stock crashes, you
still have 499 others that can offset any losses.
With the IRA tax break and easy access to diversification, low-cost funds are a
great option, even for investors with only a small amount of money to invest.
Invest in yourself
One option many people overlook is the notion of investing in themselves. This
tax refund may be your opportunity to do that.
If you have a knack for writing, a few hundred bucks can build you a website. If
you're handy, buy some tools and take out a few classified ads. If you're a
shutterbug, buy some top-notch gear and build a portfolio that might get you
into the wedding photography business.
The downside is that your plans may never pan out. But there's risk in
everything, from the stock market to entrepreneurship. Wouldn't you rather lose
your money on your dream business than on Wall Street?
The upside is that the ceiling is limitless. Your initial investment may pay for
itself quickly, and the satisfaction of being your own boss and living out your
dreams may be beyond any dollar amount.
Saving for your retirement is wise. But making a living doing what you love may
mean you never have to truly retire at all.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.
