It’s that time of year again, tax season! Nothing quite like the joy of filling out tax documents or hours of fun meeting with your accountant. Sarcasm aside, though the process is gruelling, hopefully, the work is worth it, and you come out with a nice-sized tax return check from the IRS.
Instead of taking your new tax refund bonus and treating yourself (though a small luxury to reward yourself will certainly be a nice-to-have), let’s try something a little different this year. Put that money to work with either money-making or money-saving assets. I’ve gathered some investment ideas for your newly found riches. Scroll on down to be inspired.
Contribute to your retirement accounts
The first item on our list might be the most obvious, but if you haven’t maxed out your contributions to either your 401k or IRA, use this little bonus to get your accounts maxed out. Utilizing the tax benefits on these accounts can benefit exponentially as time moves on. Not to mention the compound interest that will be generated by investing in target funds.
A $1,500 investment today could end up being $11,418.38 by the time you retire in 30 years. This is just the return of what one tax check can bring. Imagine what 30 years of tax returns can add up to. Oh, the magic of compound interest.
As a reminder, the maximum allocation for 2021 is $19,500 for your 401k and $6,000 for your IRA.
Low Cost ETFs
Have you maxed out your retirement account contributions or want the ability to sell without being penalized? A low-cost ETF is a great alternative.
ETFs that follow major stock indexes are popular investment vehicles for passive investors. They follow indexes such as the S&P 500 or the Nasdaq composite and provide similar returns. Vanguard & iShares are the two largest companies offering ETFs, and their products follow just about every major stock index globally.
One thing to watch out for is fees. Look for expense ratios of less than .2% for passively managed ETFs that follow indexes. Higher expense ratios can start to eat away at your profits.
Royalty Income Investments
Did you know you can make money by listening to your favorite songs? Song royalties are becoming a popular alternative investment and can be a great way to invest your tax return.
With royalties, an investor owns intellectual property rights to music or songs. The investor gets paid every time the song is played on the radio, streamed, or appears in a tv show/film. Royalties take passive income to the next level where you get paid for simply owning the IP.
Popular song royalties can be expensive, but there are more affordable songs that you can purchase with just your tax return.
Check out the Royalty Income Investment Guide over at Nickel & Dime Decade to learn more.
Precious metals are a great way to hedge any investments you may have in the stock market. Since gold and other precious metals are generally inversely correlated to the stock market, they can protect your net worth when there is a crash in the market.
Some popular precious metals include gold, silver, platinum, palladium, and copper. All of which can be purchased via alternative forms besides the metal itself.
An easy way to invest in any of these metals is in the structure of an investment trust. These trusts are traded as ETFs. Investment trusts physically hold the actual metal in a safe location, and by purchasing shares in the trust, you are buying a share of metal they are holding.
Junk Bond ETFs
Junk bonds are bonds from sources that have low credit ratings. These low credit bonds pay a higher yield than the higher-grade investment or federal bonds we deal with in the US. They are typically issued from foreign governments or companies that have seen better days.
These bonds make up for the risk by paying out a higher return on the bond. Similar to how you pay a higher interest rate on your mortgage if you have a low credit score.
Typically, junk bonds are risky investments There is a chance the issuer could default on the issued debt, and the investor will lose their entire investment. But when purchasing an ETF, you are buying thousands of these bonds all at the same time and diversifying your stake. This enables you to cut down on risk while enjoying the benefits of high yield. What’s not to love?
Money Saving Investments
The main way people look at investments is as income-producing assets. Though this is true, it is only a part of the story. Investments can also be items that lower expenses and that save money in the long run.
Simple money-saving investments that might fit into your tax-return budget might include some of these:
- Replacing heating oil with natural gas to heat your home.
- Investing in LED lightbulbs to save on electricity.
- Buying a fun recreational item that you can use instead of spending money in town.
- Higher quality insulation to keep utility expenses low.
These are just a few ideas where a small investment can save money over the long run. The small money-saving investments are often overlooked, but the savings will compound over time and put more money in your wallet than many assets.
Invest In Yourself
Benjamin Franklin once said, “An Investment in Knowledge Pays the Best Interest”. Though Franklin’s words are over 250 years old, they still ring true today. Your tax return money could go toward education that could help you develop your career, or even find a new one.
Many Universities offer certificate programs that are much more affordable than typical degrees and supply just as much knowledge. I personally took a process improvement course at Villanova a few years back for a tax-return-friendly budget.
A cheaper alternative than a formal course would be to teach yourself a few things. There are plenty of books that I have read on investing and personal finance that are $20 or less. These are the perfect add-on if you have money left over from one of our other ideas.
There has been a lot of buzz recently around the cryptocurrency world, especially Bitcoin. Your tax return likely won’t afford you a Bitcoin, which has gotten above $50,000 recently, it can afford you some of the lower-cost “altcoins”.
Altcoins are all the other cryptocurrencies that aren’t Bitcoin. Each altcoin has its specific pros and cons so make sure to do your research before you go all-in on the next Reddit or Twitter-promoted coins. Most altcoins are much more affordable than Bitcoin that can fit nicely in your tax-return budget.
Every little bit of extra money you can put into investments will compound for years to come. Keep a long-term mindset, continuously invest your tax-returns into any of these buckets and you’ll be sure to see financial returns. Note that you must be careful not to fall into any of the common investing pitfalls!
Have any investment ideas that I missed? Feel free to leave more ideas in the comment section!
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