Loss aversion explains why paying taxes hurts more than it should. Set aside expected taxes in a separate account as soon as you earn income, so the withdrawal feels less painful because that money was never part of your main cash pool.
Taxes are painful, and the reason is because of a psychology called loss aversion. Imagine you came here to the office and I saw you and said, hey, here's 100 bucks. Good to see you. Maybe a little awkward, but it would feel great to receive 100 bucks. Now imagine a second scenario where I see you say, hey, good to see you. Here's a hundred bucks. Oh, give me 40 bucks back in taxes. Now, it's painful because you just received $100, which was kind of awkward, but great, and now I'm taking money back. This is really odd. And, gosh, I had 100. Now I only have 60. Imagine the third scenario where I see you and say, hey, good to see you. Here's 60 bucks. Not taking anything away. You're getting 60 bucks. We know logically scenario two and scenario three are identical, but there was nothing taken away with our taxes. It's when the money's taken from us that we feel the pain. So in your business and your personal life, when money flows in and you're going to have a future tax responsibility, first allocate that money out to a separate account before you see it. And now when the government takes it, it's not as painful.
