This suggests that people find it easier to save money when it comes to them in large chunks. When it arrives in small incremental pieces, it is too easy to just fritter the extra few dollars away.Besides the value of using a refund as a savings vehicle, the idea of putting your money to work for you as soon as possible is not as important as it used to be. With interest rates on savings accounts near zero, that money is not going to do much work for you over the course of the year anyway. If having it accumulate into a refund increases your chances of saving it, you will probably be better off. A hierarchy of strategies All of this represents a bit of a pragmatic trade-off, balancing what would be optimal against what people are most likely to do with the money, depending on whether they receive it in one big chunk or in a series of regular increments. In a perfect world, this would be the hierarchy of withholding and spending strategies, from most to least effective:
- Minimize withholding and save. Have the extra money automatically directed into a retirement plan or savings account. This way, you get the money as soon as possible, but without the temptation to simply spend it.
- Accumulate money via a refund and save it. However, if rates on savings accounts ever perk up, you might want to take a closer look at how much money you are losing by waiting till the end of the tax year to deposit this money.
- Minimize withholding and spend. Again, nearly half of people who minimize withholding seem to do this, which does not help them in the long run.
- Accumulate money via a refund and spend. This is the worst of both worlds -- you are waiting longer to get your hands on the money, and then not doing anything constructive with it.