- Investing isn’t the only way you can make money off your tax refund.
- Several bank accounts can also help you earn a profit.
- Compare all your options before deciding what to do with your refund.
No brokerage account? No problem.
If you filed your taxes, you may have a tax refund coming your way. Investing is one of the best options for your tax refund if you don't need the money right now. But if you've never invested before, you might be a little hesitant to try it, especially with all the stock market volatility right now.
Fortunately, there are other ways to grow your tax refund without the risk of loss. Here's a look at three options for you to consider.
1. High-yield savings account
A high-yield savings account is a savings account that earns an above-average annual percentage yield (APY). The best high-yield savings accounts right now offer APYs around 0.50%, and in the past, they've been as high as 2.00%.
If you qualify for the average $3,226 tax refund and invest it in a high-yield savings account earning a 0.50% APY, you'll have $3,242 after one year. And after 10 years, you'll have $3,391 -- and that's assuming APYs don't rise at all during this time. If they go up, you'll earn even more on your savings.
You can also grow your tax refund with a traditional brick-and-mortar savings account, but these usually have much lower APYs, which is why a high-yield savings account from an online bank is a better choice for most people.
2. Certificate of deposit (CD)
Certificates of deposit (CDs) can offer APYs that are even higher than high-yield savings account APYs, but they carry a big caveat. You must agree not to touch the funds in the CD for the entire CD term. This could be anywhere from a month to several years, depending on the type of CD you choose. Withdrawing your funds early can cause you to lose some of the interest you would've gotten had you left the funds alone. But you usually won't lose your principal by investing in a CD.
Typically, longer-term CDs have higher APYs, but going with one of these means tying up your cash for years. To get around this, a lot of people use CD ladders. This is where you divide the total amount you plan to invest into equal sums and invest them in CDs of varying lengths. For example, if you have $5,000 to invest, you might put $1,000 each into a one-, two-, three-, four-, and five-year CD.
Once the one-year CD term is up, you reinvest those funds in a new five-year CD. Then, you do the same thing the next year with the two-year CD, and so on. This way, you always have access to some of your money every year and you can take advantage of the higher rates available on long-term CDs.
3. Invest in yourself
Another option is to invest your tax refund into something that will help you make more money in the future. For example, if there's a professional development course you've thought about taking or a professional certification you want to pursue, you could use your tax refund for this. Having these on your resume might help you land a better, higher-paying job in the future.
Or if you own or are thinking about starting your own business, you could invest money into supplies or marketing or whatever you need.
But if you're going to take this approach, make sure you have a clear idea of how you'll use the money and what kind of a return you expect to get from it. Make sure you've weighed the pros and cons of all the options available to you before you decide where you'll get the greatest value from your tax refund.
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