The Most Lucrative Ways To Spend Your Tax Refund

in Financial Planning by

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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Financial Samurai

Sam is the former Managing Editor of the Daily Capital blog. He worked in finance from 1999-2012 before deciding to focus full-time on his online endeavors - FinancialSamurai.com and the Yakezie Network. Sam is an avid tennis fan who loves to travel. He received his BA from William & Mary and his MBA from UC Berkeley.

23 comments

  1. Untemplater

    Thank God I’m getting a refund this year. I thought I was going to owe, phew. Great suggestions for refund returns. This reminds me that I need to send my parents some money. While that probably is “priceless” it sure does feel like an endless money pit sometimes. Just don’t tell them I said that. I’m venting because family stuff sure can get really stressful!

    Reply
    • Financial Samurai

      Glad you are getting a refund too! Always feels like a present even though it was our money to begin with.

      Regarding your parents, I’m sure for 18-22 years they were feeling like raising a child was an endless money pit as well! It all balances out in the end.

      Reply
  2. Joe Saul-Sehy

    I love it! Your post reminds me of that Zig Ziglar quote, “The more I help other people get what they want….the more I get what I want.”

    Reply
    • Financial Samurai

      Thanks Joe. With such relatively small sums of money, it’s much better spent helping and pleasing others than helping ourselves!

      Now if we are talking a $30,000 refund, it might be a different story. I still think allocating $3,000 of the $30,000 on others at least would be a great return.

      Reply
  3. Geoff

    I’m getting a refund of about $125,000. I will explain later maybe! Most of it will be saved in various accounts, both after tax and pre tax accounts. Some, however, will be used to fund a new backyard project and travel for the year. Exciting!

    Reply
    • Financial Samurai

      WOW! Now that is a mega refund! Please do explain if you have the time.

      Enjoy the backyard project and travel. Don’t forget to spend some on loved ones!

      Reply
    • Jermaine

      Geoff,

      If you have time, I would like to hear how you were able to receive a $125k return.

      Reply
      • Perfessor

        Step 1 of getting a $125K tax refund is to OVERPAY your taxes by $125K throughout the year.

        If you are getting a refund, it’s YOUR money, you just decided to loan it to the government for months at 0% interest and let inflation make it less.

        Overpaying your taxes by $125K total, throughout the year in 2013 instead of investing the money in the stock market, means you would have MISSED OUT on about $19K in market gains, plus any dividends, which might typical be about $2500 to $7500 dollars.

        If this still sounds exciting to you, just go to your employer and change your W4 form to withhold an extra $10,000 a month from your salary. Simple!

        Reply
  4. Cristin @ Eve of Reduction

    Love this post! I was pleasantly surprised by your suggestions. Really great memories with those you love are so important.

    Reply
    • Financial Samurai

      For sure Cristin. Such memories are truly priceless. A 10% return in the markets on a $3,000 refund means nothing in comparison.

      Reply
  5. Barbara Friedberg

    Barbara Friedberg

    Sam, Although I’m all for giving, I’d suggest investing a portion into the financial markets as well.

    Reply
    • Financial Samurai

      I would just much rather have a 1,000%+ return by taking out a boss and colleagues than investing it in the market.

      Reply
  6. Megan

    I clicked on this link halfheartedly, assuming it would be another “put it in your Roth” article. But this wasn’t – this was really touching, creative, energizing, and will send me off on my day thinking about how to use my resources to connect with people…. And I will call my parents tonight. Thank you!

    Reply
    • Financial Samurai

      Megan, I’m glad you dropped by and will be giving the parents tonight!

      Reply
  7. Yara

    I like all of the suggestion however if you have debt your tax return should go toward that first.

    Being debt free is : Priceless

    Reply
    • Financial Samurai

      I agree about paying off higher interest debt. This article attempts to go beyond the standard 1) pay off debt, 2) save, 3) invest.

      Even a 15% interest credit card doesn’t compare to many of the items in the post. Although I should hope people don’t have high interest credit card debt in the first place!

      Reply
  8. Cameron

    Awesome article! It should be reposted to LinkedIN and Forbes.

    Reply
    • Financial Samurai

      Thanks Cameron! Feel free to share the article on LinkedIn, FB, and other mediums!

      Reply
  9. Steve

    Spend money sucking up to my boss? I don’t think so!

    Reply
    • Financial Samurai

      Sucking up or building relationships? This is why some people get ahead, and some people continue to lag behind.

      Reply
  10. Lani

    Great ideas! I especially like treating your boss to lunch. Refreshing to the pronoun “her” in that sentence too. Thanks!

    Reply
    • Financial Samurai

      Your welcome Lani. Glad you stopped by. Don’t forget to subscribe via e-mail if you want to regularly get the latest Daily Capital content.

      Reply

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