How Our Brains Thwart Saving For Taxes
January 16, 2019
I’ve been freelancing full time for two years, and I know I won’t make it through my third if I can’t get it together. By “it,” I mostly mean the money parts, like saving for taxes.
I’ve made a mess for myself. In the first year of being a freelancer, I was so good about those quarterlies, then somewhere along the line in year two, I tripped, lost my footing, and never went back to the discipline of transferring over the estimated 30% I’d need for taxes every time a payment hit my account. Now, those beastly words I never wanted to let enter my life–“back taxes”–have become a cloud looming over me as I sleep.
The worst part of messing up financially is feeling like you’re the only one, and that your mess up is a kind of moral failing. But the emerging field of behavioral economics has only recently been digging into why humans are this way, and they’ve found that we are far from calculators with legs. We are a mess of what they call cognitive biases: blind spots, preferences, and weaknesses that evolved in a world without quarterly taxes, but with which we have to face our environment today.
I found no less than five of these biases that can impede our ability to diligently save for Uncle Sam:
The Default Effect
This bias shows that humans are more likely to go with whatever is default, or pre-selected as an action. For example, in places where everyone defaults to being an organ donor and have to opt-out if they don’t want to be, there are higher rates of organ donation. This bias can have dire financial consequences.
We tend to do whatever we have done, or whatever default has been set for us. Hence the habit of saving for taxes, especially for those coming from full-time employment, can be a hard one to create.
One study found that professors who participated in a pension plan changed their asset allocation an average of zero times. In fact, researchers found, many married participants still had their mothers listed as their beneficiaries from the long-ago days when they signed up before meeting their current spouses. The larger result of the default effect has been described as the Status Quo effect. We tend to do whatever we have done, or whatever default has been set for us. Hence the habit of saving for taxes, especially for those coming from full-time employment, can be a hard one to create.
Known to all of us who have ever looked at a dessert menu, present bias is the tendency to value what we want now over what our future selves might want, such as the ability to fit in our pants. Whenever I get paid, my present self wants all of that paycheck, and that little devil voice in my head convinces me that this one time is fine to keep it all, I don’t have to make that transfer just yet.
Known to all of us who have ever looked at a dessert menu, present bias is the tendency to value what we want now over what our future selves might want, such as the ability to fit in our pants.
It’s also known as hyperbolic discounting, meaning we discount the importance of taking care of ourselves in the future. Brain studies have shown that when we think about ourselves in the future, it even activates a different part of the brain than if we think about ourselves in the present. When it comes to saving for taxes, that means that You Now wants to be able to go out to dinner with that 30% you know you should save for You Later. But eh, who cares about her?
We are more averse to a loss than we are keen to get a gain. Look at the clickbait headlines around you, and you’ll see how each one pokes at this tendency. “Don’t miss this…” “You’ll fail without this one tip.” “You’re wasting time without…”
When we save for taxes, we feel the loss of the income now more strongly than the gain of the warm fuzzies knowing that we’ll have enough for tax day. We lose those dollars in our account, and we do not like it. Of course, you know that you should save for taxes, but some researchers estimate that we feel a loss twice as powerfully than a gain, so it’s an uphill battle.
This one is a little complicated, but it’s about balancing risk. To me, as a freelancer, I feel like I’m always balancing the risk of my bank account going negative now over my risk of not having enough for taxes later. By not transferring 30% of my paycheck out of my account, I can reduce the small, current risk that my bank account might not go negative. (I could also do this by not getting Korean chicken takeout or lattes with special milk, but that’s neither here nor there.)
By not transferring 30% of my paycheck out of my account, I can reduce the small, current risk that my bank account might not go negative.
The zero-risk bias says that it’s more enticing to me, a messy human, to reduce a smaller risk to almost zero than to reduce a larger, more meaningful risk. There’s a cognitive strain in balancing freelance finances plus making sure that you have enough for groceries this week feels like a satisfying check off on the list of risks you’re facing, even though that’s not the biggest risk to your freelancing life as getting a $10,000 bill for taxes is.
After taking all this into account, I can be less mad at myself that I haven’t saved for taxes. I’m still responsible for cleaning up my mess, and am committed to changing my flawed human ways. But one great tidbit I’ve also learned is that if you yell at yourself for a behavior, you’re more likely to just stress yourself out and repeat it.
“No shame, no blame,” as money expert Vicki Robin says.
Paulette Perhach’s writing has been published in the New York Times, ELLE, Slate, Cosmopolitan, Marie Claire, and Vice. She’s worked for Health and Coastal Living magazines, as well as various newspapers. Hugo House, a nationally recognized writing center in Seattle, awarded her the Made at Hugo House fellowship in 2013. She was nominated for the 2016 BlogHer Voices of the Year award for her essay, “Fuck Off Fund,” which is anthologized in Freshman Year of Life from Flatiron Books.
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