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These days, savers can get better returns on their cash than they have in nearly two decades.
After a series of interest rate hikes from the Federal Reserve, top-yielding online savings account rates are now more than 5%, according to Bankrate.com.
“Moving your money to a high-yield savings account is the easiest money you are ever going to make,” said Greg McBride, Bankrate.com’s chief financial analyst.
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And yet, some people are forgoing competitive returns altogether in favor of keeping cash, literally, at home.
How cash stuffing works
After gaining popularity on TikTok, more young adults are trying the so-called envelope method, or “cash stuffing,” to stay on budget and out of debt.
The premise is simple: Spending money is divided up into envelopes representing your monthly expenses, such as groceries and gas. When the cash in one envelope is spent, you’re either done spending in that category for that month, or you need to borrow from another envelope.
“There is this back-to-basics mentality,” said Ted Rossman, senior industry analyst at Bankrate.
Such tools can help impose discipline, he said, which is “a reasonable way to stay on budget.”
However, it’s not “the ideal scenario,” he added.
Some downsides of keeping cash
Stashing cash not only forgoes the protections that come with consumer banking, it may also leave you vulnerable to theft.
Whether you are covered in case of a burglary may depend on your home insurance policy, whereas banks are covered by the FDIC, which insures your money for up to $250,000 per depositor, per account ownership category.
And then there is the additional cost that McBride flagged: a missed opportunity to earn up to 5% on your savings.
“Generally, introducing the idea of budgeting is probably a positive thing but if folks are leaning on cash as opposed to taking advantage of the highest returns we’ve seen in a long time in high-yield savings accounts, then they are leaving money on the table,” said Matt Schulz, chief credit analyst at LendingTree.
For example, if you have $5,000 in a high-yield savings account earning 5%, you’ll make $250 in interest in a year.
“When you are living paycheck to paycheck, every little bit helps,” Schulz said.
Alternatives like Treasury bills, certificates of deposit or money market accounts have also emerged as competitive options for cash, although this may mean tying up your savings for a few months or more.
Vet financial advice from social media
Dvorkin recommends seeking out credible sources such as the National Foundation for Credit Counseling or the Consumer Financial Protection Bureau.
“Stay away from TikTok, stay away from Instagram,” he said.
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