Tax season might be a stressful time of the year, but it can also mean that your refund is on its way.
For a lot of people, its best to put tax refunds toward essential expenses, like lowering debt, paying off bills or saving for an emergency type of fund. However, if you are in good financial shape and can afford spending your refund somewhere else, investing it can be a smart move.
The avg. tax refund for year 2021 came out to around $2,827. If you invested the whole refund, it is likely you would grow that money to around $50,000 or even more over time. Here is how.
Choosing the best investments
The key to achieving longer-term growth within the stock market is to pick the right stocks to invest in. While there are many options to pick from, there is one that might be a great fit for a lot of investors: which is an S&P 500 ETF.
This kind of investment will track the S&P 500 index. It will include the same stocks that the index has (roughly around 500 stocks from the biggest U.S.-based businesses) and aims to copy its performance.
Despite the relative safety of an S&P 500 ETF, it is also great when it comes to its returns. For decades, the index has earned an avg. rate of return of about 10% each year. While your portfolio can experience many ups and downs in the near term, those yearly returns should avg. out to about 10% over time.
Getting the most from your money
If you were to put your tax refund money in an S&P 500 ETF and not touch your money for a while, you could earn a large amount given enough time. Say, for instance, you received an avg. refund of about $2,827. If you invested that now and are receiving a 10% avg. yearly return, that investment would grow to about $50,000 within 3 decades.
Remember, these calculations are assuming that you are not making any other contributions. If you were to keep investing a small amount of money every month, you could earn a lot more.
For example, say that in addition to you investing $2,827 right today, you also invest $100 each month. With all other factors staying the same, you would have about $247,000 after 3 decades. If you were to invest $200 each month, you would have about $444,000 in that same time frame.
Investing in stocks is a great way to build your wealth, and you do not need a whole lot of money to get started with. By investing just as much as you are able to afford and then allowing your investments to have the time they need to grow, you could earn more than you may think.