June 12, 2019

Will you blow your tax refund on something fun? Blame it on mental accounting – The Globe and Mail

People often treat money differently depending on where it comes from. This is known as mental accounting. Even though a dollar is a dollar regardless of where it comes from, to many of us, how we label it plays a strong role in how we plan to spend it. This is particularly true for tax refunds, which people often think of as “free” money, when in actuality, it is a tax-free loan to the government. It would be better to reduce the amount of tax withheld on our paycheques by filing paperwork with our employer. Although one reason for why we may not do this is because of Prospect Theory, whereby we magnify the pain of owing $5 versus the pleasure of receiving a $5 refund.

“Every year around this time, someone chastises the masses over being happy about getting an income tax refund when, in effect, they’ve given the government an interest-free loan for the year. “

Read more: https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-will-you-blow-your-tax-refund-on-something-fun-blame-it-on-mental/

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