The Windfall Effect: Turning Tax Refunds and Cash Rewards into Savings

This year's tax refund season is shaping up to be quite a boon for taxpayers. Early reports have the average IRS tax refund is up 10.9% so far this season, with an average refund amount of $2,290.¹

For many Americans, this means a check of several thousand dollars or more landing in their bank account.

The annual question remains: save it or spend it?
Research suggests the answer depends less on your willpower and more on how your brain categorizes that money.

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The Larger the Windfall, the Higher the Savings Rate

Did you know that people are more likely to save larger windfalls than smaller ones?
Studies by behavioral economists show that the way money is presented dramatically affects how we use it. The size of the windfall matters tremendously:

Small Windfalls ($10-$50): When people receive a modest bonus, they tend to view it as "fun money" and spend freely. We treat it like finding an extra $40 in a pants pocket. It wasn’t part of the plan, so it feels easy to use.

Medium windfalls ($500-$1000): These start to feel more "real" but can still be spent fairly freely.

Large Windfalls ($2,500+): A $2,500 tax refund feels more substantial and consequential than a $500 one, making people more inclined to direct it toward savings or debt reduction.
 
Research shows that for windfalls of $5,000, Americans save an average of $2,259 and put $1,487 toward debt.² 

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Why Cash Back Feels Like Free Money

This brings me to credit card rewards. Cash-back is the most popular rewards system among Americans,³ which makes understanding how these rewards are used particularly important.

Often cash-back rewards are deposited into people’s accounts in small increments or get used to purchase small luxuries like a nice meal. Our brains typically don’t register these rewards as real money because it feels unearned, unexpected, and separate.

In other words, because credit card rewards are mentally labelled as “extra money”, they are a form of money people earn slowly but spend quickly.⁴

But as I’ve written before when discussing mental accounting, a dollar is a dollar regardless of its source:

Salary ≠ “responsible money”
Bonus ≠ “extra money”
Tax refund ≠ “found money”
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Money = money.

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Applying Windfall Psychology to Credit Card Rewards

Here’s a simple strategy I use with cash-back rewards: let them build until they feel like a windfall.

Instead of applying cash back to a routine monthly bill or spending it on Amazon, let your rewards accumulate. Only redeem them once they reach a significant threshold: say $500, $1,000, or even $2,500.

Why does this work?

By waiting until your rewards hit a meaningful number, you transform them from invisible "bonus money" into a tangible windfall that triggers the same psychological response as a bonus or tax refund.

That $1,000 in accumulated cash back suddenly feels more substantial, important, and worth saving rather than squandering.

Let's say you spend $50,000 annually on a 2% cash-back card. That's $1,000 per year in rewards. If you redeem monthly ($83/month), those small amounts feel like 'fun money' and disappear into casual consumption. But if you wait the full year and redeem the $1,000? Suddenly, it feels like a larger bonus worth depositing into your Roth IRA.

Yes, accumulated rewards lose a tiny bit to inflation, but if waiting helps you actually save that $1,000 instead of spending it, you come out miles ahead.

Interestingly enough, Fidelity has already built this into a product. Their credit card deposits 2% cash back directly into a linked brokerage, IRA, or 529 account automatically. It's a great idea, but for those without a Fidelity account, the same principles still apply.

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Making Mental Accounting Work For You

We can’t eliminate mental accounting; it’s how our brains naturally organize money.
But you can structure your finances to use it to your advantage.

For tax refunds:
Treat them like earned income, not bonus money. Set a commitment device before the refund arrives.

“If I receive a refund over $1,000, I'll put 50% directly into my brokerage account”

For cash-back rewards:
Disable automatic redemption and let rewards accumulate to at least $500–$1,000. Then, deposit them directly into a dedicated savings or investment account.

For Bonuses:
The same principle applies. A single $3,000 bonus feels more “saveable” than twelve $250 monthly rewards, even though the total is identical.

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The Bottom Line
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This year's larger tax refunds present an opportunity. Research consistently shows that people save about half of substantial windfalls. But whether you save or spend depends largely on framing and mental categorization.

By understanding how windfall psychology affects your decisions, and by strategically accumulating smaller rewards into larger lump sums, you can turn mental accounting from a liability into a savings tool.

The money in your tax refund and your credit card rewards is your money.
​
Treat it accordingly.


More Reading:
The FIRE Tradeoff: The Risk of Running Out of Life Before You Run Out of Money​
Budgeting Sucks. Do It Anyway.
The Subscription Trap: How Consumer Psychology Is Quietly Sabotaging Your Financial Plan​
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​References:
¹ Kate Dore, "Average IRS tax refund is up 10.9% so far this season, early filing data shows," CNBC, February 13, 2026.
² Empower, "What would Americans do with a windfall?" Survey of 1,011 Americans conducted March 6, 2024.
³ "Survey: Rewards cardholders prefer cash back," Bankrate, February 13, 2025. According to Bankrate's 2024 Credit Card Rewards Survey, 50% of rewards cardholders prefer cash back as their favorite feature.
⁴ Milkman, K. L., & Beshears, J. (2009). "Mental accounting and small windfalls: Evidence from an online grocer." Journal of Behavioral Decision Making, 22(3), 242-251.