One of the most frequent questions I'm asked is what to do with a windfall. This time of year that question is often prompted by taxpayers getting a refund.

Through Feb. 16, the Internal Revenue Service says refunds have averaged $2,733, nearly $100 more than last year. During my most recent online discussion, many people wanted to know whether it's better to use a tax refund for savings or to tackle debt.

One reader wrote: "I recently purchased a used vehicle for $10,300. I have a 6 percent fixed-rate loan on the car with a four-year payoff ($1,268 in interest over four years). I will also get $3,600 for my totaled car and $1,200 from my tax refund. Should I take that money and apply it to my car loan or stash it away in a Roth IRA? Or should I take out a loan from my Thrift Savings Plan with 4 percent interest to pay off the car, where the payment and interest would go back to me?"

In this case, I would suggest establishing an emergency fund. If this person already has one, I suggest using the $4,800 to pay down the car loan — if that's the only debt he or she has besides a mortgage. Do not borrow from your retirement fund. Yes, in theory you are paying yourself interest, but you're also removing money from your portfolio and reducing its potential returns, which could exceed the interest rate you're paying to borrow your own money.

Here's another reader's debt dilemma: "I got a huge tax refund that would ... pay off a good chunk — about half — of my credit-card debt. But I am embarrassed to say that I have no savings at all aside from my 401(k). I am wondering if I should divvy up my refund between establishing an emergency fund and paying down my credit cards. I need your common-sense advice."

Establish an emergency fund. The ideal is to have between three and six months of household expenses in a rainy day fund. In this case, just one month's worth will do. Use the rest of the refund to reduce your credit-card debt.

Another reader had a similar question. "I'm 25 and will receive an $8,000 tax refund this year as a new homeowner. My rainy day fund has two months' worth of expenses, and I can't decide between building it to a full three months first then putting the rest of the refund toward my biggest student loan, or paying the loan (9 percent interest) off entirely. I'd love to see that one loan (I have three more) disappear and not pay any more interest. But I worry that it would take another eight months to build up to a three-month reserve. What would you do?"

I would pay off the one student loan entirely.

Let's look at the math. You have $8,000 in student loan debt at 9 percent. If your loan is for 10 years, you would pay about $4,160 in interest. If you save $8,000 in a simple savings account earning 4.5 percent (about what you can get with an Internet bank), you would earn more than $4,400 in interest if you let the money sit and earn interest and the rate stays constant (which it probably won't, but for this purpose I'll keep things simple).

On first look, it appears you're ahead a few hundred dollars if you save the refund as part of your emergency pot. But don't forget to consider taxes you'd pay on the interest. Of course, that could be offset some by a tax deduction for the interest paid on the student loan. (Depending on your income, the maximum amount of interest that can be deducted is $2,500 per year.)

However, let's get real. Most people won't let the money just sit in a savings account. They end up spending it on a big-screen television, vacations, car repairs, or whatever. Before they realize it, the windfall is gone, and the debt is still there.

I would pay off the student loan and apply its monthly payments of about $101 to the remaining education debt.

In addition, given the fact that this young person already has a good start on an emergency fund, I wouldn't get stressed out about making it to the three-month benchmark. As long as you already have something saved in case of an emergency, building a three- to six-month reserve doesn't have to happen all at once.

More important, when faced with whether to pay off debt versus saving or investing it, keep in mind that there's a psychological reward you should factor into your decision. That's the priceless feeling of getting rid of debt.

Listen to Michelle Singletary discuss personal finance every Tuesday on NPR's new program "Day to Day." To hear her reports online, go to www.npr.org. Write to her care of The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com.