It’s a smart move to put money aside for your future tax bills but this can mean that you have a pot of cash sitting around doing nothing.
The question is; is it worth investing the cash until the point that you actually need to pay it over?
Leaving money sitting around in a current account where it earns no interest is a bad move because inflation gradually eats away at it quite apart from the fact that it could be doing something more useful instead.
It’s also a bad move to leave your money in plain sight because sometimes that’s just too tempting and before you know it you’ve spent your nest egg that was destined to keep the taxman happy!
The answer to the question then is that yes, putting your tax cash somewhere it will earn you money is a good idea.
It’s important to say that you should always keep your cash liquid or at least available at the point you need it so longer-term investments are out of the question.
So if you are in the situation where you have your tax money sitting about what should you do with it?
Your bank will be able to set up a savings account very quickly and there’s no doubt that this is the easiest method of earning interest on your tax money. It’s also very convenient because you can add to it at any time and manage your pot of cash using your normal banking app.
But convenience comes at a price because with interest rates at a historical low point, deposit accounts actually earn you very little indeed.
It’s a safe method of earning a little cash but with low interest rates, you may feel it is not necessarily worth the effort.
Also, make sure that your bank doesn’t charge a fee for opening or maintaining the account as this could wipe out any gains instantly.
Many banks offer term savings accounts that pay a better rate of interest as long as you don’t make any withdrawals within a certain time-frame.
Often there will be stipulations that you have to give notice (notice accounts) or that your money isn’t repayable for a defined period (term accounts).
Because your money is tied up the interest rates are better and with a little organization, you can make sure that your terms coincide with your tax payment date.
One of the best known (and arguably least understood) methods of investing is to buy stocks.
There are so many dealing services around now that it is really easy to do and when it comes time to pay your tax bill, stocks can be sold really quickly to generate the cash you need.
Stocks will earn you more money than many other types of investment but there is a caveat to this; they are riskier.
The message here is to do your research, make sure you have a well-diversified portfolio and when you are buying, understand the different stock order types.
If you invest wisely then you should make much more on your money than simply sitting it in your savings account.
Corporate bonds are a form of debt that provides cash for companies as an alternative to taking out a bank loan.
For investors, they provide an income in the form of interest and they can be bought from the date of issue or on a secondary market.
Trading isn’t for the novice though and you’ll need the help of a good broker to make sure that you buy wisely.
Also, be aware that the interest payment dates may vary between bonds and the company won’t pay back the capital until the maturity date of the bond.
A very safe form of investment, government debt, or treasuries, is a good place to put your stash.
Treasuries come in the form of Treasury bills (T-bills), notes (T-notes), and bonds (T-bonds).
T-bills are securities that have a short maturity span of up to a year. T-notes range from two to 10 years maturity rate, while T-bonds have a maturity rate of 30 years.
Although government debt tends to have a long maturity date, they trade on a secondary market and so are very quick to sell but you will need a broker.
Paying down your own debt
It may seem odd to suggest that a good investment is to pay off debt but it makes great sense.
If you are running the business using an overdraft or even credit cards then you will be paying a very high rate of interest and so reducing your balances is a good option.
Using your tax cash to pay down debt temporarily reduces the interest you pay, which has the same effect as receiving interest from an investment but you do need to make sure that you’ll be able to increase your borrowing when your tax bill comes due, so only do this using flexible debt types.
Investing for the short term makes sense
We’ve seen just a few of the ways that you can make a short-term return on a pot of cash that you may have sitting around.
Investing your tax money means that you earn interest but it also means that inflation isn’t chipping away at your pot of gold.
It also means that you aren’t going to be tempted to dip into cash that is really earmarked for a different purpose.
Using specific, short-term financial products to invest your tax money is a smart move so why not take a look around and see what type of investment is right for you?
Smith Willas is a freelance writer, blogger, and digital media journalist. He has a management degree in Supply Chain & Operations Management and Marketing and boasts a wide-ranging background in digital media.