Investing Your Federal Income Tax Refund

On April 16th some people will owe money to the IRS, but others will be getting a federal income tax refund. If you've ever received a large tax refund from the IRS, I don't have to tell you what a great feeling it is. It always reminds me of the old Dire Straits song, "Money for nothing."

Your individual refund could be anything from $50 to several thousand dollars, and if you're like most people, you want to maximize your federal income tax refund and use the extra money to treat yourself in some way, or even invest in your long-term financial security. Some will use their tax refunds for an exotic vacation or a new car. Others may spend their refund on home additions or repairs, a new computer, or put it straight into a child's college fund.

But by far, the smartest way to use your federal tax refund is to invest. There is no greater feeling than using money to "grow" more money, and for many people, a sizable tax refund is the largest sum of money they will have at once during the entire year. Of course, it's always tempting to splurge on a home-theater system or a HD-TV, but investing your return in your future will bring the most long-term happiness.

Begin by assessing your current financial situation. How is your savings account doing? Do you have any investments of any type? If like many people, your current saving is minimal or even non-existent, don't worry. By starting now, you can still amass a healthy savings that will hold you in good stead for the future. The key is to start right now, whatever your current situation, and develop the habit of saving for tomorrow.

They say it takes money to make money, and this is one reason why investing your federal income tax refund makes so much sense. Unforeseen events can happen in anyone's life; divorce, illness and other events are unfortunately a fact of life. But when these events do happen, you will recover and move on much quicker if you have instigate a reasonable savings/investment plan now.

You've got to have a Plan

One of the safest investments for your federal income tax refund is index funds. An index fund is a fund made up of a cross-section of all companies on the stock market. Indexes tend to be much safer investments than putting your money into specific companies or even sectors of the market.

An index fund actually tracks the progress of the ENTIRE market, not any specific sector or company. Historically, the stock market itselfs grows at an average of 15-20% annually over the long term. This means there can be months or even years when the market is down, but over time, it averages out to about 15-20% growth annually.

Investing in indexes is certainly not a get rich quick scheme--it's a long term approach. But if you are saving for your future, and plan to leave your money alone for 5-10 years minimum, an index fund is the safest way to invest.

In fact, when investing in an index fund, you can only lose money if the entire market crashes--and stays crashed! This is, of course, something that has never happened in the history of the stock market.

Tax time will soon be upon us, and if you're expecting a tax refund, make a decision to use it wisely. This year, don't just "blow" your federal income tax refund; invest it in your future.