Question of the week: This year for the first time I'll be getting a very nice tax refund check-about $4,000. I'd really like to make the most of this unexpected windfall. What do you suggest I do with it? --Miami Taxpayer
Dear Miami,
We asked the members of the Armchair Millionaire community what they'll be doing with their refunds. Here's what they told us:
Start saving. "I'm receiving just over $1,000 back and am planning to finally get an emergency fund established." --Professor G.
Pay off debt. "My wife and I already received our tax refund of $4,149, which we have used to pay off our two car loans." --James B.
Spread it around. "I will be getting over $8,000 back this year and plan to equally divide it between investing for my children's education and refinishing my basement." --Gregor
Of course, the biggest bang of all from your tax refund check would be to put it to work in the stock market. If you invest your $4,000 in an index fund achieving the historical average annual return of about 11 percent, and then add another $2,000 to the account each year, it will grow to over $500,000 over the next 30 years. My checklist will guide you on this route.
The Armchair Millionaire Checklist for Sensible, Long-Term Investing
Choose diverse, low cost investments. You want a balanced investment that will track the overall stock market. At the same time, you don't want to see your money drained away by high the high fees or loads that some mutual funds charge. To achieve both these goals, a no load index fund is your very best bet.
Minimize your taxes. Taxes on your investment do nothing but drag down your overall returns, so take full advantage of tax-advantaged accounts. You can defer your taxes by using a traditional IRA, or steer clear of them altogether by using a Roth IRA.
Reinvest all returns. Over time, you'll get the most growth in your portfolio from compounding returns, so be sure to have all interest and dividends automatically reinvested.
Start now. Compounding returns need time to work, so give your portfolio as much as you possibly can. Don't delay in starting to invest.
THE BOTTOM LINE: Building a powerful portfolio doesn't require special genius or a huge amount to begin. All you need is a modest amount--like your tax refund--and the commitment to stick with a long-term plan. Get started now.
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