If you’re a smart money manager, you’ll take time on Tax Day to fill out one more form—a savings deposit form. With a healthier economy and less overall debt among U.S. households this year, tax time is an excellent opportunity to start or add to a savings account because the hard work of saving has already been done.
Saving money is hard. To save even small amounts, you have to deny yourself or your family the immediate pleasure of spending. That’s not easy to do when you’ve already been putting off purchases to stay on budget. But having savings is important to individual families’ security as well as our national security. Most Americans already participate in a national savings plan called “federal withholding tax.” Although frequently maligned, withholding tax is relatively painless because the money comes out of your paycheck before you see it, touch it, or have to hand it over to the tax collector. Once you file your taxes, the extra money you saved in your withholding account is returned to you (without interest).
Nearly 75% of Americans will get a tax refund, and the average refund in 2011 was $2,800—the biggest lump sum that many households see in a year. And most people say they plan to save part of their refund. But once the money is in their hands, fewer people actually put any portion of their refund into savings. There are too many barriers that get in the way such as procrastination, lack of spending self-control, and hassle of dealing with the financial institution. What’s missing from the tax filing process is a means for people to easily, painlessly, and automatically put part of their refund into a savings account.
To overcome the human tendency to delay saving or not save at all, researchers from Washington University in St. Louis and Duke University joined with tax software giant Intuit Inc., (makers of TurboTax) to test the Refund to Savings (R2S) program. The R2S program is woven seamlessly into the Tax Freedom Edition online tax prep software to take advantage of the “golden moment” when taxpayers know the amount of their refund but don’t have the money in their hands. At this point, the R2S program tests different messages to learn which message best motivates people to save. Each message also suggests a different savings-to-spending ratio. The test of R2S continues through midnight April 15, so the test results aren’t in yet. But other research has shown that people are willing and able to save money if they have access to simple, automatic means of saving, such as automatic payroll savings plans (Thaler, Richard H., and Shlomo Benartzi. “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.” Journal of Political Economy 112, no. 1 (February 1, 2004): S164-S187.).
Creating savings with a tax refund is a good idea any year, but an especially smart move in 2013. Although the economic recovery has been modest thus far, the country’s financial forecast shows continued, steady growth that will call for increases in interest rates. According to well-respected policy experts such as Fareed Zakaria, the editor-at-large of Time and a columnist for the Washington Post, American banks emerged from the economic crisis wiser and stronger. By putting at least part of their tax refunds into savings, American families can build a stronger financial foundation that will help them weather the next inevitable storm – whether it’s a natural disaster or a manmade emergency.
To encourage more Americans to save, the government needs to create a universal tax-time savings program that offers all taxpayers an easy way to designate a percentage of their tax refunds for automatic deposit in a savings account. Additionally, to create a new generation of savers, policy makers should give tax-free status to children’s savings accounts.
Until the government rolls out a universal tax-time savings program, Americans will need to exercise their self-determination. By putting 25%, 35%, or 50% of your tax refund into savings, you can buy yourself the best present possible – growing financial security and peace of mind.