If so, two things come to mind:
- You need to adjust your withholding or take a hard look at your tax situation. No one should get a refund, because all you are getting is your own money back without interest.
- If you are getting a sum back that is large enough to make you think about what you should do with it (or if you come into a lump sum through the tax rebate, a bonus, an inheritance or other means), consider an investment in your future.
What does an investment in your future look like? That depends, of course, on where you are in life and what goals and dreams you have. How you get there financially, will depend on your tolerance for risk and how much time you have to achieve your goal or dream.
Here is a general rule that may help with your planning to meet your goal. It relates to different financial products and the amount of time you have to work towards your goal. If you have:
- Two years or less – Fixed income products such as bank certificates of deposit, U.S. Treasury bonds and bills, very high quality corporate bonds and money market accounts. These accounts provide a very safe place for your funds, although they don’t pay high returns. For this short period, you should be concerned about preserving your capital and not taking big risks.
- Two to four years – A slightly longer time horizon gives you more flexibility in picking products. Mutual funds that offer a balanced approach (mix of stocks, bonds and cash) and high-yield money market funds are good bets for part of your investment. If you tend toward a more conservative approach or you are saving for a “must have,” such as college tuition, keep a big slice of your cash in fixed income products.
- Five years plus – If your goal is out there a ways, you may want to consider individual stocks as primary investments along with a few mutual funds for balance. Individual stocks offer the greatest opportunity for growth, but also carry the most risk. You don’t want to put your whole retirement nest egg into stocks just before you need it. Stocks can be volatile in the short-run, so you may not be able to predict what they will sell for when you need the cash.
The less time you have to achieve your goal, the more conservative you need to think about your investments. Potentially high returns always mean high risk and are often accompanied by greater than normal volatility. Don’t let market fluctuations disappoint you when time is short. If you have the time, let more aggressive products work for you. Don’t try to play “catch up” by investing in higher risk products to meet short-term goals.
The hidden danger that can disrupt the best of plans is rising inflation rates, which destroy the returns of fixed income investments.
If inflation concerns you, keep more of your assets in stocks of companies that are able to raise prices to keep pace with inflation. This may require an adjustment in the percentage of assets held in stocks, which is an important consideration for those investors nearing or in their retirement years.
