Investing your tax refund: How you could turn the average refund into $100,000 through an ETF
Though tax returns aren't due for another month, you may have been an early bird and filed yours already. In fact, you may already be sitting on your refund.
But what should you do with that money? Many people have been hurt financially by the pandemic, so you may need your refund to pay for things like housing, groceries, or other essential bills. And if you don't have a healthy emergency fund -- enough money in the bank to cover at least three months of living costs -- then your tax refund should go directly into the bank.
But what if you're doing OK financially and don't need your tax refund for a specific purpose? In that case, you have a prime opportunity to turn that refund into a whopping sum of money. In fact, you might manage to turn your refund into $100,000 -- or more.
Boost that refund
The average tax refund issued this year as of April 2 was $2,893. That's more than twice the amount of the stimulus checks that recently went out to the public. If you're sitting on a comparable sum, investing it wisely could help it turn into a cool $100,000.
But what if you've never invested before and have no idea how to pick the right stocks to help you achieve that goal? Well, here's some good news -- you actually don't need to know a whole lot about the stock market to do well in it. In fact, there's a specific investment designed for people in your boat -- S&P 500 index funds.
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Index funds are passively managed funds that aim to match the performance of the market indexes they're tied to. The S&P 500, meanwhile, is an index that's comprised of the 500 largest publicly traded companies.
S&P 500 index funds, like all investments, come with risk. But over time, the S&P 500 has managed to deliver solid returns, so if you stick with S&P 500 index funds, there's a good chance you'll manage to grow your wealth substantially.
How much growth are we talking about? Over the past 30 years, the S&P 500 has delivered an average annual return of over 12%. Now, let's say you get a refund for $2,893. And let's also be a little more conservative and say that over the next number of decades, the S&P 500 delivers an average annual 10% return. If you invest your $2,893 in S&P 500 index funds and let your money sit for 37 years, you'll wind up with just over $100,000 -- without having to do any extra work.
Of course, there's a host of S&P 500 index funds to choose from, but to get started, consider the Vanguard S&P 500 ETF (NYSEMKT: VOO). It has a strong performance history and is a good bet if you're looking for a solid investment to get started with.
Put your money to work
Your tax refund isn't the same as a stimulus check -- it's money you earned but never got paid up front. Now that it's back in your pocket, you have a prime opportunity to put it to work -- and grow a whole lot of wealth in the process.
Maurie Backman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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