David Cay Profile Picture
Staff Writer at Debt Reduction Services

us-dollars-imageWinter is starting to fade, and it seems like summer can’t arrive soon enough. It’s during this time of the year that we observe tax professionals busily shuffling papers and working long hours. It seems every other television and radio commercial is talking about taxes, getting you the biggest refund and guaranteeing accuracy.

Tax season is here, and many of us are receiving refunds. Think about the years past. What did you spend your refund on? Did you blow it on fun stuff? Did you pay bills? If you’re getting a tax refund or find extra money you didn’t expect, like many of us, you may perceive it as free money and blow it. You may even spend it before you actually receive the refund! Today we will discuss in this blog, how to properly perceive extra unplanned money and what to do with it when you get it.

There is a cliché that perception is reality. When it comes to something as abstract as money, how we perceive it will change our reality. I find that if I didn’t earn money as part of my paycheck, it becomes a different kind of money. It has transformed into something magical and awe-inspiring. It’s free. It can be used irresponsibly because it was not part of my expected income. I even go so far as to think that I will absolutely not spend it on boring needs. So with my tax return in hand I ask myself: What do I really want to do that is frivolous? This is a perception many of us have when pondering spending unexpected money.

Most of us assign categories and account for our money in our heads. Certain money is spent on certain things. Consider a scenario where a relative gives you $50 for a special occasion. You have a past due water bill. Mentally we think money that we receive for a gift isn’t to be used on that past due water bill. Yet you need water to live… but since this is fun money, it cannot be used for that water bill. This is the mental block we have with different categories of money. Of course money itself isn’t tangible to these categories, it’s we who separate it out.

Consider another scenario: You are going to a rock (or country, whichever you like) concert and on the way you lose $50 in cash. That was the money you were going to use for the concert; are you still going to go and pay another $50.00? What if instead of losing cash you lost the ticket to get into the concert? Here is where mental accounting comes into play. If we lose cash, it’s lost. If we lost the ticket… to replace will cost another $50 and that then makes the ticket total cost to us $100. We are a lot less likely to buy the ticket again because we would be overspending on the account in our head. It’s unreasonable to pay $100 for the show. What is bizarre is that if we lost the same amount in cash we don’t spend it on that account in our head the same way.

One more scenario: You’re at a clothing store to buy a shirt. One is priced at an everyday cost of $50, and you are almost ready to get it. Then you see almost the same shirt with a popular fashion name on clearance, and its cost is $60. Seems like a no brainer. Save yourself $10 and get the everyday priced shirt. Here is where mental accounting can throw a wrench in the mix. We will see the regular price of the brand fashion shirt is $452.39. So instead of saving an actual $10 we will pay $10 more to save a theoretical $392.39. And what is the funniest part of this decision? We are thrilled to pay $10.00 more! We have to stay grounded and realize; they are BOTH shirts! Of course if you are anything like me you might be wondering if the fashion name is one you like… Branding typically gets us to overpay, and we should stop thinking this way.

If you find yourself thinking along these lines when pondering your tax return, you’re definitely not alone. Try to remember, a tax return is your money. Don’t fall into the trap of paying for a faster tax return. It’s tempting considering it’s free money… why not get it faster for a little less? The reality is you overpaid for your taxes, and it is NOT free. It is your money, and you should consider that the fee to get your refund faster IS IN FACT actually costing you.

Have you rethought how to categorized your tax return in your head? Is it going to be fun money? Here is a link to a tax refund pyramid our very own Education Director, Todd Christensen, put together to help spend tax returns: https://www.debtreductionservices.org/emep/the-tax-refund-pyramid/

It’s your money, whether you spend it responsibly or frivolously. I just hope this blog helps you gain perspective to spend it the way YOU want.

  1. Rick

    I think this is a great post, it really nails the point that our money is indeed OURS as in a possession we should care for. It’s easy to think of bonuses or tax returns as free money because it helps us rationalize why we’re spending in the first place.

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