Q: I'm getting a tax refund of about $3,000. I've been thinking about starting investing, so is now a good time?
Getting a tax refund can be a great way to start investing, but the biggest question to answer before opening a brokerage account is whether you could put the money to better use elsewhere. If you have lots of debt -- specifically, high-interest debt -- it might not make good financial sense to start investing.
Think of it this way: Even great investors generally don't earn returns of more than 10%-12% per year. Historically, a well-balanced portfolio of stocks and fixed-income investments has generated annualized returns of about 7%. (If you do better, great! But let's use this as our base expectation.)
If you have debts that have lower interest rates than this -- such as a mortgage, student loans, or auto loans -- it can make good sense to invest your extra money instead of paying them down faster.
On the other hand, if you have debt with higher interest rates than you can reasonably expect to earn by investing, it is generally a good idea to use any extra money for debt repayment before you start to invest.
