Investing is a key part of building wealth and saving for long-term goals such as retirement, so using your tax refund to invest can be a great choice. Securities such as stocks and bonds can be used to build a diversified portfolio that can grow significantly over time.
Mutual funds and ETFs can be used to build diversified portfolios at a low cost, so you won’t have to worry about choosing which individual stocks or bonds to buy. Most online brokers allow you to get started with just a few dollars, so don’t worry if you don’t have much to invest initially.
You might also consider using a robo-advisor, which helps build an investment portfolio based on your goals and risk tolerance, but charges a much smaller fee than traditional financial advisors. The top robo-advisors have investment apps that make it easy to track your portfolio from your phone.
The key distinction between using your tax refund for investing in assets like stocks versus using it to save is the amount of risk involved. Stocks are volatile in the short term, so only invest the money if you’re confident you won’t need it for the next five years or so. If you may need the money, a high-yield savings account is likely a better choice.
Additional tax refund resources
“Ultimately, you have to ask yourself what’ll make you feel better in the long run,” Flannigan says. If in the future you’d like a smaller refund, she says you could increase your withholding allowances.
“So, less income tax will be withheld, your refund will be smaller, but your monthly paycheck will be larger and you’ll be able to spend that money on your goals instead,” Flannigan says. Or you can think of your tax refund like it’s forced savings.
This story originally appeared on Bankrate and has been independently reviewed to meet journalistic standards.