February 13, 2018
Which Low Earners Save Tax Refunds?
Cash-strapped workers understandably are tempted to spend their tax refunds, a sort of financial lifeboat that floats by once a year.
Financial experts see the windfall as something more: an ideal opportunity to sock money away. Yet only about 10 percent of low-income workers save their refunds, even though doing so could prevent the financial dominoes – past due bills, late rent payments, or delayed car repairs – from falling. These are common outcomes when their spending gets out of whack.
Past experiments that tried to encourage cash-strapped low earners to save had modest success. A novel research study looks for clues to what motivates them by examining who spends the refund versus who saves it. The central finding in a Journal of Consumer Affairs article: the people who saved had put some thought into predicting the size of their refunds at the time they filed their taxes. This held true whether their estimates were accurate or not.
The act of estimating in advance “appears to be a form of planning,” said the researchers, University of Rhode Island professor Nilton Porto and Michael Collins, director of the University of Wisconsin’s Center for Financial Security.
Porto said they don’t know the reason estimating leads to saving, but he had one idea. The connection between the two could stem partly from the taxpayer having some advantage, such as financial skill or superior knowledge – in short, they might have higher financial literacy. …Learn More