Tax season may just be the highlight of the year for people who anticipate a refund, because the money could provide the opportunity to be used for anything they want. The average 2014 tax refund was $3,034, and it was slightly higher for those who opted for direct deposit which was $3,096 according to an article from USA Today. But what’s the smartest way to spend that extra cash? According to the same article, some surveys showed that most Americans plan to pay down debt, although one survey conducted by a financial adviser cited in the same article concluded that young adults between 18 and 34 were likely to spend it on entertainment and shopping.
While everyone’s plans for their tax refunds may be different, knowing what you could do with that money is a great starting point. With that said, have you considered using your refund to invest in the stock market? After all, if you have excellent money management skills, you may not need to spend your tax refund to pay down debts or to fund a shopping spree. If you are treating your tax refund as discretionary income, than investing may be something you can try. Remember though, as Michelle Matson, the VP of Matson Money says, discretionary income is your extra money after you have paid all of your bills and living expenses.
Once you’ve determined that your tax refund is ‘disposable,’ you can begin looking into the stock market. Describing your tax refund as ‘disposable’ only means that the money won’t affect your current financial status or lifestyle. Also understand that investing in the stock market involves risks that you must be prepared to take. The market fluctuates, which is ok because the fluctuation can provide the return, but may also result in losses should you need to liquidate your investment.
When you begin to navigate the fundamentals of the stock market, you have the opportunity to engage with investor coaches and advisers. Take, for instance, Mark Matson of Matson Money, who recommends balancing portfolios through diversification and focusing on long term investments. But remember, investment strategies are not guarantees, past performance is not indicative of future performance and investors’ financial goals may not all be the same. Your tax refund offers many potential benefits, but you should consider acting carefully when deciding what you want to do with it.