According to Time.com, 75 percent of Americans will receive a tax refund this year, but they aren’t always helpful to your bottom line.
“Most of the nation’s 100 million or so individual filers of federal tax returns will get a refund this year—an estimated 75%, in fact—and for those lucky souls we have a message: Be careful; windfall monetary gifts can be dangerous to your financial health.The culprit is one of the most common decision making biases identified in the past four decades of research in the field of behavioral economics. It’s called “mental accounting,” and it’s a subject visited frequently in this blog. Mental accounting is the process by which the human brain, consciously or otherwise, labels and prioritizes money differently depending on where it comes from (paycheck vs. gift from grandma), where it’s kept (savings account vs. stock market), how it’s spent (home repairs vs. vacation cruise), or size of transaction (we value a $5 discount on a $20 item more than same discount on a $100 purchase)….”
“Research suggests that if you get a $300 refund you’re more likely to make a $300 discretionary purchase with it than if you get a $3,000 refund—even though you can afford to splurge more, and still save a lot, in the second instance. (Up to a point, of course: Given a big enough windfall, most people will splurge and save.) It seems that a larger amount of found money makes it more difficult to spend, serving to boost what economists call our “marginal propensity to save,” or MPS. Smaller windfalls, on the other hand, increase our MPC, or “marginal propensity to consume.”…”
“For whatever reason, small windfalls were mentally accounted for not only as eminently spendable, but as spendable over and over again! If this sounds unbelievable, consider the following story about about a friend, whose tale I first told in the book referenced in my author’s bio. My friend, “Gideon” (not his real name), worked overseas for a small U.S. company. While on vacation in the U.S., he stopped by his employer’s Manhattan headquarters and, to his surprise, received a $400 bonus. A splendid gift, he thought, until he realized at the end of his trip that he had spent that $400 five times! Basically, every time Gideon went into a store or restaurant, he and his wife used that bonus to justify spending more money, i.e., “What the heck, we have $400 more to spend than we thought we had!””
We are still waiting to find out if we are getting a refund, and I do think we are mentally spending it in multiple ways. I see it going toward shelves in our family room, a new dishwasher and a camping trip, and it clearly won’t cover all those things. Also it would be nice just to stick it into savings.
So are you expecting a refund? What is your plan for it? Will you save it or spend it? Do you think you will spend more than you actually get back? Will it cause you to overspend?