Consumers are usually getting a windfall of cash about this time of year, making them feel a little wealthier.
It's not from winning the lottery. Actually, it's their own money that the U.S. government has been sitting on for a year without paying any interest.
Tax refunds are eagerly anticipated, in part, because they are forced savings programs. The employer takes money out of each paycheck so the consumer never really sees it. So while it probably isn't the best way to go about saving, at least it's one way to save.
The question now, of course, is what do you do with the money you get back from the Internal Revenue Service (IRS). The tax agency estimates the average taxpayer will get a $3,211 refund, so it's not exactly chump change.
Start an emergency fund
One productive use of a tax refund is to start, or add to, an emergency fund. This is money you would tap if you faced an unexpected car repair bill or had to replace a water heater in your home.
Without an emergency savings account, most consumers would be forced to add to their credit card balances. Worse still, some would seek cash from a payday lender.
So even though an emergency savings account will earn almost no interest, it could keep you out of debt in the long run – which is a pretty good return.
Michael Wesley, head of KeyBank's financial wellness initiative, says an initial goal should be an emergency fund equal to three months take-home pay.
"Build on those savings until your emergency fund is the equivalent of six months of take home pay," Wesley said in a release.
Health savings account
If you already have an adequate emergency fund, you could also consider using a tax refund to start a health savings account (HSA). With high-deductible health policies, an accident or illness could present you with high out-of-pocket medical bills.
There are also some tax benefits to HSA contributions, meaning you might get an even bigger refund check next year.
Studies have shown that Americans are not doing a very good job of saving for retirement. So why not use your tax refund to start, or add to, an individual retirement account (IRA).
Again, there are tax benefits. Contributions to a traditional IRA are tax deductible but Roth IRA contributions are not. If you go this route make sure you get some qualified financial and tax advice.
Pay down debt
Finally, use your tax refund to pay down credit card balances. Credit card debt can often seem overwhelming. Here's the opportunity to pay off a big chunk of it in one payment.
True, tucking your windfall away or spending it to pay off debt isn't nearly a fun as taking a vacation or buying a new refrigerator, but it can be a solid step toward improving your financial well-being.