Plan Now to Save Your Refund!

"Mental Accounting" is a very cool economic concept, created by Richard Thaler, which basically says that we tend to put our current, and future, money into certain "buckets" or accounts. Once we put money in these mental accounts, we tend not to take them out. For example, we know what paycheck our mortgage or rent comes out of and we don't take from that money. Similarly, and sometimes to our detriment, we put money into grocery or clothing categories. Even if the electric bill went up this month, we have a hard time reallocating money from the grocery or clothing accounts to cover the higher electric bill.

Many of us start planning in November for whatever holiday we celebrate and thinking of the gifts we would like to buy friends and family. If we haven't been saving for these expenses throughout the year, we buy them anyway knowing that there's a tax refund coming early next year. We have already put that refund into a mental account to pay for holiday bills.

I'd like to propose a different idea. Start now in November and put at least half of that expected refund into a mental account for savings. It's the one time in a year where a chunk of money comes our way and having some put away for an emergency will result in a lot less stress when that emergency, invariably, comes our way. Take a look at your holiday expenses and find creative ways to reduce them so you don't wake up in January with a "hangover" of bills and regret.

Using the "Mental Accounting" concept can help us change our financial decisions to help us reach our financial goals and stress less over money.