In the current financial climate, savers have the opportunity to achieve returns on their cash that haven't been seen in nearly two decades. Thanks to a series of interest rate hikes by the Federal Reserve, the highest-yielding online savings account rates have now exceeded 5%, according to Bankrate.com.
According to Greg McBride, Chief Financial Analyst at Bankrate.com, "Moving your money to a high-yield savings account is the easiest money you are ever going to make."
However, despite these lucrative opportunities, some individuals are choosing to keep their cash at home instead of pursuing competitive returns.
How Cash Stuffing Works
The so-called "envelope method" or "cash stuffing" has gained popularity, particularly among young adults, often through platforms like TikTok. This method is used to help people stay on budget and avoid accumulating debt. The concept is straightforward: money is allocated into envelopes that represent monthly expenses, such as groceries and gas. Once the cash in an envelope is spent, you either refrain from further spending in that category for the month or borrow from another envelope.
Ted Rossman, a senior industry analyst at Bankrate, suggests that this back-to-basics approach can be a way to impose discipline and stay on budget. However, he acknowledges that it might not be the ideal scenario.
Downsides of Keeping Cash
Storing cash at home not only lacks the protections provided by consumer banking but also exposes you to the risk of theft. Whether you are covered in case of a burglary may depend on your home insurance policy, whereas banks are backed by the FDIC, which insures your deposits up to $250,000 per account ownership category.
Additionally, as highlighted by McBride, there's the missed opportunity to earn returns of up to 5% on your savings.
Matt Schulz, Chief Credit Analyst at LendingTree, emphasizes that while introducing the concept of budgeting is generally positive, relying on cash instead of taking advantage of the current high returns in high-yield savings accounts means leaving money on the table. For example, if you have $5,000 in a high-yield savings account earning 5%, you could make $250 in interest in a year. In situations where people are living paycheck to paycheck, every bit of additional income can make a significant difference.
Alternative options, such as Treasury bills, certificates of deposit, or money market accounts, have also emerged as competitive alternatives for managing cash, although they may require locking up your savings for a few months or longer.
Vetting Financial Advice from Social Media
For individuals seeking reliable financial guidance, Howard Dvorkin, a certified public accountant and chairman of Debt.com, advises that there is a wealth of educational resources available. However, he cautions that not all the "expert" advice found on social media platforms is necessarily accurate or suitable for your financial circumstances. While traditional financial advisors can be vetted, it is more challenging to determine the intentions or potential conflicts of interest of online advice givers. Dvorkin suggests relying on reputable sources like the National Foundation for Credit Counseling or the Consumer Financial Protection Bureau and being cautious about advice from platforms like TikTok and Instagram.
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