by Tyler Curtis
With tax season behind most of us refund checks are starting to roll in. According to statistics from the IRS this year’s average federal tax refund will be around $2,913. When met with a windfall of funds sometimes our mind can play tricks on us. People tend to view buckets of money differently based on how the funds were earned. Behavioral finance refers to this term as mental accounting.
To the perfectly logical economic mind, a tax refund of say $3,000 should be spent just like any other income. After all, a dollar is a dollar, no matter where it came from. But that’s not how we humans think. When money comes into our lives suddenly and is not earmarked with a clear purpose, such as a tax refund, there is no set mental account for it and we tend to view it as found money. Unfortunately we have a tendency to blow found money. A tax refund just doesn’t seem to have the same value as a paycheck even though it’s money that literally should have been in your paycheck.
The key point to consider for mental accounting is that money is fungible; regardless of where it came from or its intended use, all money is the same. You can cut down the frivolous spending of “found money”, by realizing that this “found money” is no different than money you earned by working.
The Lemon blog put together an infographic that highlights where Americans are spending their tax refunds this year and gives some helpful advice on how to spend your tax refund.