If you have a tax refund check and you have funded your emergency savings account or have already paid off your debt, then you may be interested in investing or at least identifying ways to grow your refund. If this is the case then there are a few things you can do to grow your refund. Please keep in mind that when you start to invest, there is a chance that you could lose money. However, this is why you need to understand your risk tolerance prior to investing money. You also need to consider if and when you need the money, because you may also incur fees for accessing your money once it has been invested.
CD (Certificate of Deposit) is a savings tool offered by banks that has varying term lengths. The standard range of term lengths is between 1 – 3 years, although it could be as short as days or as long as decades. It depends on the financial institution. The longer the term length (i.e. the longer you keep your money deposited with the bank in the CD), the more money you earn on the account.
CDs are pretty safe and there is low risk of losing your money because CDs are generally FDIC insured up to $250,000. The other benefit is that, if you don’t want to incur much risk with your money, the interest rates, although not very high, are better than a savings account.
The drawback is that if you withdraw your money before the term length expires, you will be charged a penalty. This penalty varies per bank, but you could end up giving up between 3 – 6 months of accumulated interest. Depending on the terms of the agreement and how early you withdraw your money, you could end up losing part of your initial deposit. For example, I invested in a CD at one point and didn’t anticipate needing the money so soon. However, something came up and I had to withdraw the money early. Since I withdrew within the first couple of months of depositing the money, the penalties ended up eroding part of my initial deposit. Therefore, it is very important to not just look at the return, but also realistically evaluate when you may need access to the money. Check out bankrate.com to evaluate the CD rates. Also, note that you may find a better rate at a credit union as opposed to a bank.
Bonds are another form of investment. They are a debt investment where an investor loans money to typically either a corporation or a municipality. The money is borrowed to finance a variety of projects or activities. The entity borrows the money from an investor as opposed to a bank for a specified period of time and at an agreed upon interest rate. For example, a municipality may issue bonds to raise money to repair the roads as opposed to increasing taxes.
Bonds are not without risk because it is an investment. Bonds are safer than stocks, but if a corporation goes bankrupt then since it is a form of debt, the corporation can attempt to restructure the bonds and reduce the amount that they have to pay back. As with any investment, think about whether you can afford to lose the money. Consider the riskiness of the bond and your own risk tolerance prior to investing. If you are interested in bonds but have really low risk tolerance, then look at U.S. Treasury bonds, notes, or bills because they are virtually risk-free as the federal government backs them.
Similar to the discussion with CDs, prior to investing, think about whether you need the money. Bonds are issued for a certain period of time, therefore if you sell it early then you may receive less than what you paid. Think before you invest.
If you are looking for something that has a better return and you are able to tolerate market risk and fluctuation then it is worthwhile to look at stocks. I want to reiterate that you must be able to tolerate risk before you invest, because your investment may decline in value. For example, have you ever seen on television about how the market had a down day or a major sell off? When that happens, people who have their money in the stock market have lost money. Also, if you think back to the Great Recession, did you notice that your retirement account lost value? This is because there was a declining market. When you invest in the market you have to have a long-term mindset (think: greater than 10 years) and you have to be able to stomach the ups and downs of the market.
One last point about stocks is that a well-balanced portfolio contains diverse investments. As you get closer to needing the money, you should adjust your portfolio to reduce your risk. For example, if you have a child in college and you have money set aside for them in stocks, then you want to start moving that money into cash or safer bonds, as they get closer to graduation. If not, then there could be a huge downswing in the market that would result in the loss of or reduction of your investment and you won’t have the time to make up the money. This example of college savings may seem fictional but think about someone that you may know who has the age to retire but cannot. During the Great Recession so many baby boomers were too heavily invested in stocks as they neared retirement and when the market collapsed they saw their nest egg disappear and as a result were unable to retire.
How do you invest in stocks and bonds?
If you have a retirement account then you probably already have both stocks and bonds in your portfolio. If your investment manager creates pre-packaged investment products then they will have stocks, bonds, and potentially other investment products in there. Focusing on investing in your retirement account is a great way to grow your portfolio because of the tax savings associated with retirement investing. Also, if you work at a job that matches your contribution, then you will see even more growth.
Directly investing in the market
There are a number of sites that you can use to invest in the market such as:
- A service like TD Ameritrade, Trade King, or Etrade – these are online brokers that allow you to do a variety of investment services such as investing, retirement planning, and stock trading. Check out this post here from Aja McClanahan of Principles of Increase that will walk you through how to set up an investment account and begin investing.
- A brokerage account through the investment division at your bank
- Betterment – a DIY online investing service that allows you to automate investing according to your specific risk tolerance and your investment goals.
If you are going to use an online or brokerage account, make sure you look into Exchange Traded Funds or Index Funds because these tend to carry less risk because of greater diversification and fewer fees. Depending on the service that you use, you may even be able to purchase these funds commission-free.
College savings accounts
You can also enter the market by opening or contributing to a college savings account. There are some favorable tax benefits for contributing to a college savings account and you can start saving early so your children can go to college with less debt. One thing to note is that it is best to make sure you have a fully funded emergency savings account and that you have been maximizing your retirement contributions prior to using your income to contribute to a college savings account. The two biggest reasons are:
- If you have a financial emergency, then it’s better to withdraw the money from savings so you don’t incur fees, penalties, or taxes that can reduce the growth of your investment.
- As parents, you may not like this reason because we are wired to put our kids first. However, if you do not have adequate retirement savings that will allow you to cover your bills in your retirement, then you may not be able to retire or you may be forced to drastically reduce your lifestyle. Your children can always qualify for loans, work-study, grants, or scholarships, but you don’t have access to those same things to fund your retirement.
As you can see, there are a number of things you can do besides saving your tax refund or paying bills that can help you to achieve your financial goals and start to see an exponential growth of your income. However, please remember that investing requires risk and if you are not prepared financially by having a solid savings account, then it is best to wait until you are in a better position to start. If you have other questions, please consult with a financial advisor that can advise you based on your specific situation.
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Aisha Taylor is a single mom of twins, personal financial coach, work from home entrepreneur, and #1 Amazon Best Selling Author of the book “5+5 FNPhenomenal Ways to Save $100 This Week Without Killing Your Lifestyle.” Aisha has been featured in ESSENCE, Jet Magazine, and Black Enterprise. She is also the Founder of FNPhenomenal (Frugal –n- Phenomenal), a movement designed to help single moms create a vision for their lives, craft a financial strategy to support that vision, and show them that phenomenal living is possible. It’s time for you to be Financially Phenomenal!
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