Over 91 million American households have already received a tax refund in 2024. Only a small group of those households will take the extra step to turn that money into a much more valuable asset.
Just 9% of Americans plan to invest their tax refund, according to a January survey from Bankrate. Interestingly, 28% of respondents said they plan to put the money into savings. While there are plenty of reasons to keep a balance in your savings account, the big discrepancy between people planning to save versus invest suggests many people don't know what they'd invest in.
The good news is it's never been easier to invest your money. You don't need to be a genius to take your tax refund and turn it into a much more valuable asset. You could turn this year's tax refund into a whole lot more with one simple Vanguard ETF. Here's how.
Image source: Getty Images.
The only investment you need to get started
One of the best investments for anyone just starting investing is an S&P 500 index fund. Vanguard created the first index fund in 1976 and it still operates some of the most popular with the lowest fees in the industry. You can buy the Vanguard S&P 500 ETF (VOO -0.29%) at most brokerages. You'll pay an expense ratio of just 0.03% per year, which means for every $1,000 you have invested, you'll pay $0.30 in fees.
An S&P 500 index fund offers an excellent foundation for any portfolio. It provides the benefits of immediate diversification by spreading your investment across 500 or so companies. The S&P 500 index includes a selection of the largest American companies that have been consistently profitable. That makes the index less risky than an index that tracks smaller stocks without a profitability requirement.
Importantly, choosing an index fund is a smart choice versus an actively managed mutual fund. While fund managers are some of the brightest minds on Wall Street, they cannot consistently outperform the market enough to offset their fees. The vast majority of the time you'll be better off sticking with a simple index fund like the Vanguard S&P 500 ETF.
Turn your tax refund into $47,000
The S&P 500 has historically produced a compound total return of 9.8% per year since its inception. And before you think the best years are behind us, consider that the most recent 15 years have produced even better returns for investors. Granted, the decade before that saw investors running in place.
The point is the market moves in cycles. On average, though, you can expect about 9.8% per year from the S&P 500.
The average tax refund so far in 2024 is about $2,850. If you invest the entire amount into the Vanguard S&P 500 ETF, here's what your expected portfolio balance will look like over time.
| Time Elapsed | Expected Investment Balance |
|---|---|
| 1 year | $3,129 |
| 5 years | $4,548 |
| 10 years | $7,259 |
| 15 years | $11,585 |
| 20 years | $18,488 |
| 25 years | $29,506 |
| 30 years | $47,089 |
Data source: author.
Just a one time investment can turn into more than $47,000 in 30 years as long as you reinvest your dividends. You could end up with more or less, but the longer your time horizon, the more likely you are to end up somewhere around the expected balance. If you have more to invest, you could easily end up with more. And imagine if you took your tax refund and invested it every year. Just doing that for long enough could be enough to retire on, depending on how big your tax refund is.
Should you invest your tax refund all at once?
You might think it's risky to invest your entire refund all at once. After all, the stock market currently trades near an all-time high. Wouldn't it be safer to wait for the market to pull back, or at least save some of it to invest later?
Some people prefer to invest a certain amount over a pre-determined amount of time. For example, it might make sense to spread your tax refund investment purchases over the next 12 months. That describes a strategy known as dollar-cost averaging.
While that might give you the opportunity to invest in the market at a lower price, it's also possible the market will only continue to go up in value. In fact, the odds are much more likely that stocks will move higher after reaching a new all-time high. After all, you wouldn't invest in the market today if you didn't expect stocks to keep going up.
Historical data shows that investing a lump sum produces better results than dollar-cost averaging. So while it might be tempting to wait for a pullback, it also might never come.
