Message to Millennials: Your tax refund could make you rich one day.
Cash-strapped young people looking to jump-start their savings should view their IRS refund as a key source of investment seed money. Paying off debt with that money is another option, of course, as is splurging on a vacation.
But Millennials in search of financial motivation should consider this statistic: Plowing the average tax refund of roughly $3,000 into shares of three popular stocks — Amazon, Apple and Netflix — over the past 10 years would have turned a $30,000 investment into nearly $220,000, according to an analysis by Rubicoin, a digital educational investment platform.
That six-figure savings balance is “enough to pay off student debt, credit cards and much more,” the study authors note.
“The takeaway is that anyone, regardless of their financial knowledge, can build long-term wealth by taking just a few positive steps in the right direction,” says Emmet Savage, CEO and co-founder of Rubicoin. “When someone receives a windfall like this — a few thousand dollars that they previously didn’t have — it’s easy to spend it on something that is instantly gratifying like a holiday or a new TV. Making the decision to forgo that in favor of long-term financial freedom isn’t just possible, it’s actually pretty simple.”
The analysis by Rubicoin, which notes that the average Millennial has been in the workforce for 10 years, was simple, stock-specific and easy for even novice investors to understand.
Starting in 2009 and ending this tax season, they assumed a Millennial took the $3,000 tax refund and put $1,000 into each of the three popular stocks on the first day IRS refunds were available, normally in mid-February. That strategy resulted in a profit of roughly $190,000.
Obviously, Amazon, Apple and Netflix, which along with Facebook and Google parent Alphabet make up the popular “FAANG” trade, have been among the market’s best-performing stocks in the 9-year-old bull market.
Of course, one of the biggest challenges facing most Millennials — now the nation’s biggest generation — is coming up with cash to stash away in investments that can grow their wealth in a significant way over time.
Due to sizable student loan bills and careers and income streams that were interrupted by the fallout from the financial crisis, getting ahead financially and having so-called “disposable” cash to deploy hasn’t been easy.
Those savings challenges are made clear in a just-released survey of 1,000 Millennials by tax-preparation service Jackson Hewitt that found 66% plan to use their tax refund to “pay off bills or debt” and 37% who said they will “reward themselves.”
Just 40% of respondents said they intend to put at least part of their refund into savings.
To take that cash-crunch reality into consideration, USA TODAY asked Rubicoin to run the numbers anew, assuming Millennials would only invest a third of the average tax refund — or $1,000 annually — in the three popular stocks for the same 10-year period. That initial $10,000 investment would have grown to more than $73,000.
From a pure savings standpoint, using at least some of your tax refund to invest for long-term goals such as retirement is a good idea, says Andrea Coombes, investing and tax specialist at NerdWallet, an online personal finance site.
“For Millennials especially, it makes sense to try to invest their refund because they have time on their side — time to ride out market dips and to let compounding help them max out their savings,” Coombes says.
What she doesn’t recommend, however, is to use the money to buy cryptocurrencies and other speculative investments.
“You’re essentially rolling the dice” with those risky investments, Coombes says, adding “that for long-term savings goals like retirement it is better to build a diversified portfolio with low-cost mutual funds.”
There are also ways to use your tax refund to invest and save you taxes down the road, says Mark Steber, chief tax officer at Jersey City N.J.-based Jackson Hewitt.
“A big tax refund is a good thing if you do something wise with it,” he says. “Put a good portion of it into savings or investments.”
And if those investments purchased with your IRS refund provide future tax benefits, all the better, Steber adds.
For example, if you know you are getting a sizable tax refund for the 2017 tax year that you plan on using to fund a traditional IRA, you can report the amount of your IRA deposit on your 2017 tax form and then use the cash you get from your refund to actually fund the individual retirement anytime in 2018 before the tax filing deadline on April 17, 2018, Steber explains. Another benefit of putting money into an IRA is your money grows tax free.
Millennials, Steber adds, can also put some of their tax refund, which are dollars that have already been taxed, in a Roth IRA, a retirement savings vehicle that allows you to withdraw funds in retirement without paying any taxes on your gains.
“There are many tools in the tax code that will benefit your savings,” Steber says.
The bigger message is for Millennials is to ignore all the noise about the stock market and investing and just get started, Rubicoin’s Savage says.
“It’s about getting into the mind-set that the biggest risk you can take is doing nothing,” Savage says. “Financial independence isn’t just going to fall into your lap one day. You have to take positive steps to make it happen.”
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