If you're like many Americans, you're probably getting a tax refund this year. In fact, the IRS reported the average refund was $2,827 in 2021.
When you receive a lump sum payment -- especially if it's for a significant amount of money -- you'll have to decide what to do with it. The good news is, you can more than double the cash that you get back from the IRS if you make one relatively safe investment with it.
This simple move could turn your tax refund into much more money
If you're interested in more than doubling your tax refund, there's one investment you can make with it that's all but certain to help you achieve that goal. You can invest the money in an ETF that tracks the S&P 500.
If you buy an S&P 500 ETF, you'll be investing a small amount of money in each of the approximately 500 companies that make up the Standard & Poor's financial index. This index is often viewed as a good way to measure the performance of the stock market as a whole, as it includes around 500 large companies that are household names and that operate across a wide variety of industries.
The S&P 500 index has a very long, very consistent track record of producing 10% average annual returns, so it's about as risk-free of an investment as you can get -- as long as you keep your money in for the long term since it does have some down years. There are several great S&P ETFs out there with low fees, so you don't really need any investing skills to find one. And it can really pay off for you.
Say, for example, you get the average refund of $2,827 and invest it in an S&P 500 fund for a decade. By the end of that period of time, assuming you'd earned the average 10% annual returns, you'd have about $7,332.51. That's well over the $5,654 that would double your refund. In fact, you could likely still achieve your target even if returns fell short of 10% in a few of those years.
Should you invest your tax refund?
Doubling your money over a decade is an attractive prospect, and it's worth investing your money in order to have a chance to do that -- as long as some caveats are met.
First and foremost, if you have high-interest debt, you may want to pay that back first before investing. If you save 17% interest by using your tax refund to pay off your credit card, the guaranteed 17% return that would result is going to dwarf the 10% you're likely to get from an S&P fund.
And if you do have your debt paid off, you'll need to decide if an S&P 500 ETF is the right investment choice for you. While it's a safe investment that gives you a really strong chance of doubling your money, it's not going to beat the market. You may be able to earn even higher returns -- and do much more than double your cash -- if you have the time, knowledge, and interest to invest in individual companies.
Ultimately, the important thing is that if you get a tax refund, you use it to improve your financial situation as much as you can. The exact steps you should take to do that are going to depend on your personal financial situation and investing prowess. But if you don't have costly debt and aren't sure how to buy stock shares in specific businesses, you really can't go wrong with an investment in the S&P 500.