Q

What should I do with my tax refund?

A

We recommend investing it!

Tax refunds have been called the biggest paycheck of the year. Since the average refund is $3,120, it’s worth noting: with great windfalls come great responsibilities…as well as a host of truly terrible temptations. So what are you going to do with yours?

As our colleagues at Wealthsimple Magazine recently showed, many seemingly gratifying ways to spend that money won’t pay off with long term joy dividends. Filling your laugh lines with enough injectables to make you look like the star of a Hellraiser sequel? Installing a Jacuzzi (aka a petri dish-in-training) in the backyard? Putting it all on Whichever-coin happens to be the can’t-lose cryptocurrency of the moment, until it falls off the cliff a week from Tuesday? Though perhaps tempting, none of these ideas will provide the kind of continuing contentment you could get from sitting back and watching a small investment grow big over the years.

As is always the case, if you’re carrying credit card balances, those should be paid first, since any investment gains will never be able to offset what you’re paying in interest on card debt. If you have a big purchase coming up in the next three years, like a special trip, a wedding, or a down payment on a house, consider parking your money somewhere safely outside of your checking account where it can earn some interest, like the Wealthsimple Smart Savings account we now offer for just such purposes.

If you’re free of debt and have no immediate need for the money, consider putting money directly into your SEP, traditional, or Roth IRA. Data on investment returns consistently shows that in the vast majority of cases, low-cost, passive investments that mirror major stock indices outperform active stock pickers, active stock pickers, who nonetheless charge you major fees for their services. Not long ago, Warren Buffet estimated that Americans wasted $100 billion in fees over ten years time. Wealthsimple will help guide you to find the absolute right exchange-traded funds, or ETFs ,to turn your tax refund into something that you’ll be able to marvel at for years to come.

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