More than 91 million American households have already received a tax refund in 2024. Only a small group of these households will take the extra step to turn that money into a much more valuable asset.
Only 9% of Americans plan to invest their tax refund, according to a January survey by Bankrate. Interestingly, 28% of those surveyed said they planned to save. While there are many reasons to carry a balance in your savings account, the wide gap between people who consider doing so save versus invest suggests that many people don’t know what they would invest in.
The good news is that investing your money has never been easier. You don’t have to be a genius to turn your tax refund into a much more valuable asset. You could turn this year’s tax refund into so much more with a simple Vanguard ETF. Here’s how.
The only investment you need to get started
One of the best investments for anyone starting out investing is an S&P 500 index fund. Vanguard created the first index fund in 1976 and still operates some of the most popular funds with the lowest fees in the industry. You can buy the Vanguard S&P 500 ETF (NYSEMKT: VOL) at most brokerage houses. You’ll only pay an expense ratio of 0.03% per year, meaning that for every $1,000 you invested, you’ll pay $0.30 in fees.
A S&P500 the index fund provides an excellent foundation for any portfolio. It offers the benefits of immediate diversification by spreading your investment across approximately 500 companies. The S&P 500 index includes a selection of the largest American companies that have been consistently profitable. This makes the index less risky than an index that tracks smaller stocks without profitability requirements.
It’s important to note that choosing an index fund is a smart choice over an actively managed mutual fund. Although fund managers are some of the brightest minds on Wall Street, they cannot consistently outperform the market enough to offset their costs. 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, know that the last 15 years have produced even better returns for investors. Certainly, the previous decade saw investors put in place.
The fact is that 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 in the Vanguard S&P 500 ETF, this is 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.
A simple one-time investment can return more than $47,000 in 30 years, provided you reinvest your dividends. You might 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. Doing this for long enough could be enough to retire, depending on the size of your tax refund.
Should you invest your tax refund all at once?
You might think it’s risky to invest your entire refund at once. After all, the stock market is currently trading at an all-time high. Wouldn’t it be safer to wait until the market falls, or at least save some of it to invest later?
Some people prefer to invest a certain amount over a predetermined period of time. For example, it may make sense to spread out your tax refund investment purchases over the next 12 months. This describes a strategy known as dollar-cost averaging.
While this may give you the opportunity to invest in the market at a lower price, it is also possible that the market value will continue to increase. In fact, it’s much more likely that stocks will move higher after hitting a new all-time high. After all, you wouldn’t invest in the market today if you didn’t expect stocks to continue to rise.
Historical data shows that investing a lump sum produces better results than cost averaging. So while it may be tempting to wait for a pullback, it may also never happen.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Mad Motley has a disclosure policy.
1 A Simple Vanguard ETF Could Turn This Year’s Tax Refund into $47,000 or More was originally published by The Motley Fool
