The 5 Best Ways to Invest Your Tax Return, According to a Wall Street Expert
Photo: Kourken Pakchanian.
Happy Tax Day! (Unless you’re one of those procrastinators who hasn’t yet filed, in which case we suggest you put this down and go do that.) Today, a portion of tax-paying citizens will be happy to learn that they can expect a hefty tax return coming their way soon. Some of you might be inclined to splurge it on that Balenciaga bag you’ve been eyeing for spring, but for those who are more fiscally responsible, you’re probably wondering how to best make use of your newfound funds. We called up Sallie Krawcheck, a Wall Street veteran and the founder of online investment advisor Ellevest, for her expert advice. Below, she shares five smart, easy ways to invest your tax return.
Keep it away from a saving’s account.
“For some people, a tax refund can feel like found money,” Krawcheck says. “Sometimes you don’t expect to get it; other times you’ve been living without for a period of time, and then here comes this free money—so don’t spend it! Please, don’t spend it. And don’t put it in the bank—invest it!” While putting your return in a savings account might seem like a good idea, you might end up financially hurting yourself in the end. “If you put your refund in a bank, you’re going to allow it to deteriorate because of the impact of inflation,” she adds. “It might feel safe, but there’s safety and then there’s losing money over a period of time.”
Invest, invest, invest!
For those who have no idea where to begin with an investment, Krawcheck suggests keeping things simple. “Put it in a boring old diversified investment portfolio of inexpensive investments,” she suggests. “Don’t buy a high-flying stock, don’t place a bet on the new store you think is amazing. If you’re younger, put it in more equities; if you’re older, less equities.” Also, once you invest your money, forget about it. “Forget about it for as long as you possibly can, and allow yourself to have the opportunity to have market-like returns over time,” Krawcheck adds. “For some folks, doing this several years in a row can mean eventually having a down payment for a home or starting a business, as opposed to spending it right this minute.”
But what if you have student loans?
While nobody ever wants to stay in debt, Krawcheck says it’s important to consider the difference between bad debt and good debt. “If the interest rates of your student loans are high, then yes, you should pay off your loans,” she says. “So if you have credit card debt outstanding, definitely pay that first since that’s always high interest. If your student loans happen to also be high—I’m talking 6- or 7-percent interest rates—then definitely go ahead and pay those off, too.”
But don’t forget to save for a rainy day.
If you don’t already have an emergency fund set up, Krawcheck advises using your return for that instead. As for how much money you should keep stashed away in a savings account, Krawcheck suggests at least three months of salary should be enough. “It should start with one month of your take-home pay, work it up to two, and then finally get it to three,” she says. “It’s for an emergency: Your car broke, you broke up with your partner and you’re out on the street, you lost your job. Particularly after losing a job, how long will it take to find a new one? For most folks, three months should be sufficient.”
What if you want to spend just a little bit of your return?
Ask Krawcheck put it: “What do you need to buy? What do you really need?” It’s important to separate your wants from your needs, and Krawcheck recommends creating a budget in order to clearly separate the two. Ideally, your take-home pay should be divided into the following categories: -50 percent for your needs: “Your rent, your insurance, your basic wardrobe. This is for the suit you need for work, not for that feathered boa you liked!” -30 percent for fun: “That’s for the feathered boa, that’s the dinner out with friends, that’s what you use to upgrade to an apartment with a balcony.” -20 percent for your future: “That’s your contribution to your 401(k) plan and the amount you put towards an emergency fund.”
Krawcheck says as long as you keep to this type of budget, you’ll be living well within your means. “It might mean a smaller apartment. In my years right out of college, I shared a bedroom with my apartment-mate because that’s what we could afford,” she says. “The mistake that so many people—and particularly so many young ladies—make is that they spend it all. They see how much they take home, and they spend every last penny.” Essentially, it’s all too easy to conflate your needs and your wants: Mentally separate the two and you’ll be that much better off. “If you have that discipline, when that refund comes along you haven’t been depriving yourself and then you can put aside that found money into your future,” Krawcheck says. “And the future doesn’t have to be boring retirement, okay? Because I know that’s a bummer. Future is buying your home; it’s starting your business. So put a picture up of your ideal home somewhere and know that you’re putting money aside for that exciting down payment or that terrific trip around the world.”
This story originally appeared on Vogue.
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