Tuesday, April 19, 2011

The Psychology of Tax Refunds

An example of a cheque.Image via WikipediaTax season is over it's time to relax. You filed your taxes and now waiting to get your refund. If your getting a refund you feel pretty good. The average refund for most Americans is around $3000. In the media and almost every financial blog you will be told this is wrong. They will say you are giving the government an interest free loan. It's true and it does make sense. But someone has an alternative view to this.

Ramit Sethi, author of "I WILL TEACH YOU TO BE RICH", has a different perspective on this idea. He says technically it makes sense to pay the government the least possible. He shoots down the idea that you are losing possible interest income on your money. What's the interest on $3,000 for the year? It comes to $2.50 per month for a total of $30 for the year. He says it's not that much of an impact on your money. Secondly, if you did receive the money in your paycheck you would probably end up spending it.

Ramit says it's a good thing to receive the money back as a lump sum. When you receive money as a lump sum, you tend to spend it more wisely. Americans use the money, on average, to payoff debt or save it. This is the psychology of tax refunds.

It's interesting that in my own experience, I have found this psychology very true. Every year for a quite a while I would receive, a tax refund, between $2000 and $3000. I would plan my budget and I was ready to use this money to payoff debt or I would put it toward my property tax. Like clockwork this went on and still goes on. Ask me if I would have it any other way and I would say, No.

Though not ever created to be a mini savings plan, it has turned out to be that way. I know people use their refunds to buy big screen TV's and other things. But for the most part I agree with Ramit that Americans use their refund to save or pay off large living expenses like I do.

I have followed Ramit for a few years now and notice his philosophy is to make money moves that are usually big. He doesn't believe in the frugal style or your "Latte Factor". He believes in making more money and having that latte when ever you want. I have his book and recommend it all. He puts out there an interesting plan for you finances. He goes against the grain of most money guru's. He preaches mostly on how to increase your income.

I am including one of Ramit's best YouTube videos where he describes how to automate the inflow and outflow of your money. He believes automation is key to a successful financial life. Watch.

Reader: Do you think a tax refund makes sense?


  1. I'm not much of a Ramit fan (primarily because at this stage of my life, early '60s, I'm not in a position to really increase my earnings) but he's absolutely right about tax refunds. It may only be psychological but that chunk of money every spring is more than I'd save on my own, and I'm grateful for it.

  2. Grace, the tax refund has become some peoples only comfortable way to save. It's basically painless and automatic. I count on mine every year.


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