According to the IRS the average tax refund for 2014 continues to hover around $3,000. Before you fly off to Vegas and bet it all on black, allow me to offer some unique suggestions for turning your refund into potentially thousands more, with much more happiness and much less risk in the process.
When interest rates were high, receiving a tax refund was a no-no because that meant we were granting the government an interest-free loan for the entire year and missing out on making a high interest return ourselves. Now that interest rates are less than 0.2% for the average money market savings account, it’s probably better to receive a tax refund. Why is this, you ask? Because it amounts to an automatic savings plan… and most Americans have demonstrated that they can’t save!
The options you’ve likely read about as the best ways to utilize your tax refund are all suboptimal in my opinion. It would be one thing if your refund was $100,000, but at $3,000 on average, you’ve got to think much smarter about deploying this relatively small sum of cash.
Let me share with you some strategies for wisely investing your tax refund beyond the traditional recommendation of saving it all for a rainy day. I’ve employed them all myself, and they helped me survive eight years longer than expected in a cutthroat industry, generate at least 10% more a year in bonus income, and build stronger relationships with friends and family.
HOW TO INVEST YOUR REFUND
1) Take your boss out to lunch (10% / $300 over the year). Your number one money-maker is your job; hence, it behooves you to invest as much as you can in making yourself the most compensated employee possible. One of the best ways to get paid and promoted is to build a tremendous support network of individuals predisposed to root for your success. When it comes time for a raise and a promotion, your name will float to the top of the list because managers tend to take care of people they like and disregard people they don’t really know. It doesn’t matter how rich somebody is — nobody can resist a free lunch!
Estimated return on lunch: 1,000%+
2) Donate to a charity that matters most to someone whom you want to impress (10% / $300). If for some reason you feel bad about taking your boss out to lunch, support her in a different way by volunteering your time or money to a charity that she cares about deeply. (Ideally, you will sincerely care about the charity as well, for congruency purposes.) Nothing builds better relationships than finding something shared in common that greatly matters. Because his mother had died from lymphoma years before, a friend of mine supported a client’s lymphoma marathon charity. The client was raising money for lymphoma research because his close friend had also died from lymphoma. Not surprisingly, the two men formed a very tight bond,and from then on my friend was perennially ranked #1 with that client.
Estimated return on donation: A lifetime connection + 1,000%+
3) Take your loved one on a weekend getaway (30% / $900). Money doesn’t matter much if you don’t have somebody you love with whom to spend it. Assuming there’s someone special in your life, you probably neglected, upset, disappointed, or saddened that person at some point during the year. Use some of your refund to apologize and show them you still love them deeply. If you don’t have someone special, then offer to take your best friend somewhere to catch up on good times and make new good times. Poll after poll shows that having a good circle of friends is the number one source of real happiness.
Estimated return on friends and partners: Priceless.
4) Thank your parents (30% / $900). Without our parents we would not be where we are today. Although most of our parents don’t expect any special thanks for raising us, it’s always nice to give back to those who may have sacrificed the most for us. Some parents are financially struggling due to unlucky breaks or poor decisions and are too proud to ask their children for help. Touch base with them and allocate part of your refund to those who could use the money most. They’ve spent a lifetime working to provide not only for you, but also for themselves in retirement. Help make their golden years the best years possible.
Estimated return on thanking our parents: Priceless.
5) Treat yourself (20% / $600). A tax refund isn’t new money; it’s money that you earned and that was owed to you all along. Most financial advisors would encourage you to save your refund, invest your refund, fund a ROTH with it, or use it to pay down high interest debt. By now, however, you’ve already invested 80% of your refund in steps 1-4, with returns that range from 1,000% to priceless; go ahead and treat yourself with the remaining 20%! A 1,000% return on a lunch investment blows away any historical 8% S&P 500 return average.
Estimated return on thanking yourself: Sanity and motivation.
FOCUS ON GIVING INSTEAD OF RECEIVING
Because the average refund is a relatively small absolute dollar amount, going the traditional route of investing or paying down debt is not an exciting proposition. Even if your entire $3,000 refund returned a healthy 10%, that’s only a $300 pre-tax return… and how much would that really change your life? Focus instead on using your refund to improve existing relationships or make new relationships. Not only does it feel better to give than to receive, you’ll likely end up receiving way more down the line anyway!
Readers, how are you planning on spending your refund? When was the last time you took out a boss or colleague to lunch? When was the last time you took your love on a spontaneous weekend getaway?
Note: Any tax refund over $10,000 starts to really become suboptimal. Speak to payroll and your accountant for ways in which to keep your tax refund in check. After $10,000, the percentages I’ve suggested in my post need to be readjusted. Alternatively, you can simply follow my advice to the T on $3,000 worth of refund money, and conservatively pay down high interest debt and save or invest the rest instead.
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Disclaimer. This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.