With tax day upon us here in the United States, a lot of people will get a refund soon. So today, we’ll discuss how to turn that refund into riches.
But this blog is really about “found” money – money you weren’t expecting. The average refund last year (paid in 2007 from 2006 tax returns) was $2,287, according to the IRS.
That’s a nice down payment on a plasma TV!
That’s what a lot of people do – spend their refunds on things that won’t be worth much in a few years.
Instead of that, you could save and invest it. But isn’t that’s boring?
Boring can be exciting when your money starts to compound!
How to turn your $2,300 refund into $643,000!
Say you’re 25 years old and you get a $2,300 refund every year until you retire at 65. We’ll assume that you earn 8% on that money, which may be a little conservative depending on what you invest in.
Under these assumptions, that $2,300 a year invested will turn into a nest egg of over $643,000 when you retire!
Now is that boring?
Age makes a difference. Take the previous example for a 35-year old. Your nest egg is still significant – it’s over $281,000. But by waiting just ten years to start, it will be less than half as much!
But even then, you still create a nest egg of nearly $300,000.
2 ways it can be even better
#1 – Quit loaning the government money at 0%.
That’s what you’re doing when you get a refund – you’re getting your money back, but you don’t earn any interest on it while they hold it. So redo your W-4 so you only withhold what you expect to owe.
Then you won’t get a refund, but you’ll have more money in every paycheck. But here’s the key:
Let’s say you do that – Invest your refund check this year, adjust your W-4, and then invest the extra money that shows up in your paycheck. You’re that 25-year old we talked about earlier. Only now …
… you’ll have over $723,000, instead of $643,000. It makes an $80,000 difference!
Doesn’t that open your eyes about the “cost” of a refund?
#2 – Pay off debt that’s costing you more than 8%.
We assumed an 8% return. If you have any debt that’s costing you more than 8%, pay it off first and your returns will be even higher! Once your debt is paid off, start investing to build your nest egg.
Jake’s Take – Top 5 signs that you hired the wrong accountant
#5 – He insists on filling out your return using only Roman Numerals.
#4 – He offers to help you boost your deductions by renting you his wife and kids.
#3 – He spends most of your consultation looking nervous and asking if you're wearing a wire.
#2 – He does all his calculations on an Etch-a-Sketch.
#1 – His client list includes Leona Helmsley, John Gotti, and the Unibomber.
Our bigg quote today is a Proverb.
So do you want to watch your new plasma TV or do you want to watch your money grow? The choice is yours!
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Next time, we’ll discuss why being imperfect is perfect. Until then, here’s to your bigg success!
(Image by gossamerLL)