Here’s Why You Should Invest It.
Many business owners and freelancers overpay their taxes and thus end up getting a government tax refund. It’s tempting to use that money for things you want, whether it’s a vacation, new furniture or the latest hot gadget. But that refund can be even more useful in helping to bolster your retirement fund.
The reason: Putting the money today in a well-diversified mutual fund – or a broad mix of investments – can let that money grow exponentially over time by taking advantage of what’s called compounding returns. So each year the pot grows bigger, so that your future investment returns have a bigger pot to build off.
With many people getting tax refunds of $3,000 or more, that refund can go a long way in helping them meet their retirement savings goals – especially if they continue to invest their tax refunds year after year. Here’s a look at how:
Let’s say you get $3,000 back from the government and you put that money into an account with an average annual investment return of 6% over the next 30 years. In that situation, today’s $3,000 will grow to about $17,200.
Now let’s say you get a $3,000 tax refund every year and funnel that money into your account. With those 30 years of compounding returns, those annual $3,000 contributions will grow to about $269,000. What if you manage an 8% return on investment? You’ll have about $397,000 after 30 years.
As you can see, the longer the money is invested, the more it will grow. So before you spend this year’s tax refund, you might want to stash it away before you spend it.
Kelly Spors writes for RothIRA.com, a leading retirement and Roth IRA resource. A former Wall Street Journal reporter, Kelly has written about small business and personal finance for The New York Times, Entrepreneur magazine, Yahoo! and SmallBizTrends.com.
© 2012, Kelly Spors. All rights reserved.