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LIFE INSURANCE

5 Ways to Invest Your Tax Refund

Joan Mathews Joan Mathews 11 July 2019
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Got a tax refund or have one on the way? Read on to know the most interesting ways to invest tax refund.

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Spending the tax refund amount is the most convenient way of utilizing the cash, but investing it for wealth creation is an unconventional and good investment decision. Receiving a tax refund offers a good opportunity for investors to improve their finances. There are various options available in the market that will help you in maximizing your tax refunds and making the most of your finances.

In this article, we are presenting the 5 smartest ways to invest your tax refunds and make the most out of it.

  • Create emergency corpus: Emergencies, like medical aid or financial crisis, catch us at the most unexpected moment. Being financially ready is a smart way as having an emergency fund is far better than having none. An ideal way of being ready to face the emergency is by keeping an emergency corpus ready, which may be equal to at least 3-6 months of your monthly income. This way you are ready to face the adversities if any come your way. Therefore, you must look at an emergency fund like an account where you can stock up your tax refunds and create a corpus that will cushion you in times of distress, like a job loss, medical emergency or sudden death of bread winner. The best way to achieve financial security is by using your tax refunds for building emergency savings.

  • Pay-off existing debt: Another smart way of utilizing your tax refunds is by paying off your existing loans and debts. If you have a high-interest loan, then paying it off immediately is one of the smartest ways of money management. High-interest loans are those where you are paying a higher amount of interest. These loans include housing loan, education loan, credit card loan, car loan etc. A smart money management skill includes prioritizing the high-interest debts and then deciding which to pay off first. From the above-mentioned loans, paying off credit card loan or car loan is a quick and smart decision as the loan amount is less as compared to other loans. Using the tax refund amount for paying off high-cost debt means you are lowering interest payment amount each month. Paying off high-interest loans is a smart way of money management that can help you in reaping long-term benefits.

  • Invest to create retirement corpus: The post retirement phase is called the golden phase of life. During the retirement phase, you want to enjoy all the little happiness by being financially independent. Starting early will enable you to save more and build a huge retirement corpus that will help you in leading a tension-free retired life. Putting your tax refunds to build retirement corpus is a smart money management decision.

  • Multiply money by investing: If you are in a financially strong position and have ticked all the above-mentioned boxes i.e. you have created emergency corpus, are successful in paying high-interest debts and have invested wisely for creating retirement corpus then it is time for you to invest your tax refunds in other investment instruments available in the market. You can think of investing in the stock market, real estate, a start-up business etc. These options are new blue-chip instruments that offer high returns on your investments. Opening an online demat account and investing your tax refunds in various stock market instruments is one of the most affordable and effective investment tools for investors. If you are thinking of investing in other instruments like real estate or a start-up business, ensure that you have done extensive research and are ready to take over the risk associated with such investments. Utilize your tax refunds carefully before making any bold moves.

  • Consider buying insurance: Insurance is an important aspect that helps us in safeguarding the future. Whether life insurance or term insurance, it is important to have both. Insurance offers coverage and helps in addressing painful situations of life smartly. Investing your tax refunds in health insurance, life insurance or term insurance will help you in safeguarding your future and the future of your family. Insurance will take care of the financial needs of family in case of the sudden death of the insured.

Things to Avoid:

Tax refund might be one of the biggest returns that you may receive in a year, so try to make the most of it by investing it. Spending the returns hastily is not good money management. Here is a list of things that you should avoid doing with your tax refunds:

  1. Spending it on purchases: Doing impulsive purchases can cause overspending of useful financial resources. Who does not like shopping or purchasing new electronic gadgets? But at the end of the day, your savings are being depleted.

  2. Spending on luxuries: Impulsive buying, expensive trips or similar type of spending on luxuries can blow off your savings. Using tax refunds for such luxuries will not help in growing your investments.

  3. Gambling: Tax refund is the amount you receive which can be made useful for better options. Utilizing this extra income for gambling basically puts your financial resources at stake. Gamble is a game of luck – while it gives an opportunity to double the amount, but do remember, you risk losing it completely.

  4. Investing in the wrong instrument: Saving the tax refund is a smart money management decision but it is very important to choose the saving instrument wisely. If you happen to invest in a non-performing instrument then it might not fetch you the expected returns. Therefore, it is very important to first research and then invest money in instruments that guarantee returns as per your financial goals.

Conclusion:

Tax refunds is the income that you have earned in a tax year. Receiving tax refunds is like a windfall gain i.e. unexpected inflow of money at an unexpected time. Therefore, irrespective of the sum of money you receive as a tax refund, you might consider investing it in any of the above-mentioned ways. Investing your tax refunds will not only result in multiplying your investment but also help in planning wisely for your financial goals.

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Joan Mathews
Written by Joan Mathews
Joan has over 4 years of experience writing for the BFSI industry. She enjoys watching mystery TV series, listening to 80s classics and spending time with her furbabies.