Personal Finance

Ask a Fool: Should I Invest My Tax Refund or Pay Down Debt?

Q: I'm getting about $3,000 back from the IRS. I was considering using it to start investing, but I was wondering if it would be smarter to pay down some debt instead?

It depends on what type of debt we're talking about. If you have high-interest credit cards, payday loans, or any other type of "bad" debt, it's generally a good idea to pay it down before investing.

Here's why: Even great investors can only expect to achieve annualized returns of 10%-12% over the long run. If you're paying 15% or more on interest, choosing to invest is setting yourself up to lose money overall.

On the other hand, lower-interest debts such as mortgages, student loans, and auto loans are generally considered to be "good" debt, provided that they don't have excessive interest rates and you can handle the monthly payments.

Although many people aspire to pay their mortgage or car down faster, or to pay off their student loans as quickly as possible, from a long-term financial perspective, investing is generally a better move. For example, if you can borrow money to buy a house at 4% interest, and can achieve 9% investment returns over the long run (the stock market's historical average), the math works in your favor.

The main consideration is whether you can reasonably expect to earn more from your investments than the interest rate you're paying on your debt. If the answer is yes, investing your tax refund can be a wise financial move.

Offer from The Motley Fool: The 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor , has tripled the S&P 500!*

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

* Stock Advisor returns as of Feb. 5, 2018.

The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics


Latest Personal Finance Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More