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May 30, 2019

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What's In A Refund?



Let’s Play!


Time for my children’s favorite game: pretend.


Let’s pretend you had an extra $260 a month. What would you do with it?


Before you start filling your head with dreams of fancy dinners and monthly massages, channel your responsible self and really think. Would you put some into your retirement account or maybe squirrel some away for a rainy day?


I’m going to say you would pick the latter, because you’re responsible and you want to do the responsible thing. (You are after all reading this amazing financial blog.)


Now, let’s pretend instead of $260 a month, you get $3,120. (For those with their calculators thats $260 times 12.) What would you do with it? More than likely your inner adventurer would take over and you would go on a trip or buy that grill you’ve been eyeing.


Where Are We Going With This?


The average tax refund in America is $3,120. That's a sizable number. Bringing with it the aforementioned dreams of jetting off to Vegas to sip mango margaritas while strolling down the strip.


But let’s take another moment to analyze where that $3,120 came from. To start we must first understand the definition of the word ‘refund’.


The definition of refund is to pay back money, or the repayment of a sum of money.


This means you earned $3,120 throughout the year and instead of putting that money towards your goals, you lent it to Uncle Sam. Then, the following April, Uncle Sam gave it back to you. We all know that means you are getting your money back. It is by nature, not found money. Found money is when you buy a coat from Goodwill and find a $20 bill in the pocket.


It’s All In The Psychology.


So why do we treat our tax refunds like found money? Studies show that while your rational side understands a tax refund is a return of your own money, people are more likely to treat a tax return as a windfall, and people are just more frivolous with windfalls.


What’s A Guy/Girl Supposed To Do?


You could adjust your tax withholdings so you get a smaller refund next April. But the reality is people are more afraid of owing money and are hesitant to do this.


Instead, make the responsible choice with your money. Pay down debt, put it in your retirement account, or sock it away for an emergency. Make a plan and be mindful of your decisions. Your refund is money you worked hard to earn, treat it that way.


Curious for more? Click here to schedule a virtual coffee.


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