Most of us have mixed feelings about tax season. On the one hand, it typically requires some extra legwork, arithmetic, and in some cases even a little professional guidance to make sure that our finances have been accurately reported. On the other hand, we usually have a fairly significant prize to look forward to at the end of all of that labor: our annual tax returns.
How much do most people actually receive in their tax returns? According to recent data, the average amount that was returned by the IRS to individuals in the United States was $2,869 in 2019. For many people, that’s the equivalent of suddenly receiving a check for a full months’ worth of labor.
Receiving an amount like that all at once immediately begs the question: how can one put their tax return to optimal use?
Recent surveys have shown that the vast majority of Americans who receive a tax return will either put it towards paying off debts or will allocate it straight to a savings account. Both practical options, without a doubt - but what about investments? Despite the long-term profits that can be gained through a well-crafted investment strategy, the data indicates that only around 1 in 10 Americans today will invest their tax returns in assets like stocks, bonds, or mutual funds.
There are several plausible ways to explain the small proportion of Americans who are choosing to invest their tax returns. The most likely explanation, however - and the one that’s supported by our experience - is simply that the majority of people lack a reliable investment strategy. Without a clearly-defined target at which to aim, most people are reluctant to commit their hard-earned tax returns to the ups and downs of the stock market. And frankly, we can’t say that we blame them.
By way of example, let’s take a look at the strategies of two hypothetical taxpayers. Bill, on the one hand, receives a $2,000 tax return, which he decides to immediately put away into his savings. His friend Ted, on the other hand, decides to invest his $2,000.
Let’s now fast forward five years into the future. Bill’s original $2,000 - which has remained in a savings account with a 0.06% API interest rate - has only grown to $2,006. Ted’s initial investment, however, has been growing at an annual return rate of 6%, which means that his funds have grown to $2,676. We might also imagine that Ted decides to contribute $100 per month to his initial investment. In that case, Ted would be left with more than $9,500 by the end of 2025.
The moral of the story is that investments - by harnessing the power of compounding interest - can ultimately leave you in a much more secure financial position down the road. But in order to take full advantage of the power of investing, it’s critical to build an optimized investment strategy.
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At Spartan Capital Intelligence, our mission is to demystify Wall Street and simplify the investment process. Through our unique, AI-driven platform, we're able to provide innovative solutions for investors as we individually and collectively navigate this uncertain moment in history.