Kimberly Palmer: What to consider before budgeting with the cash-stuffing method
The cash-stuffing method of budgeting has revived the popularity of an old concept known as the envelope system
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Your support makes all the difference.When Giovanna āGigiā Gonzalez wanted to cut back on her food spending, the finance expert and money coach applied what is known as the ācash-stuffingā method of budgeting. She put the cash she allotted to food for the week into an envelope and limited her spending to that amount.
āI could see when I had just 20 bucks left for the week, so it was really helpful,ā she says.
Popularized through TikTok videos, cash stuffing has brought back the old-fashioned envelope system of budgeting: You divide up your cash into different envelopes, each dedicated to a category of spending or saving. āItās a tried and true method,ā says Gonzalez, who also founded The First Gen Mentor, a money course where she promotes financial literacy.
If youāre considering joining the cash-stuffing movement yourself, here are some guideposts:
SET ASIDE PLANNING TIME
Cash stuffing requires an upfront time commitment because you need to plan your spending, withdraw your cash and then āstuffā it into labeled envelopes. That process could easily take an hour or two to get prepared for the week ahead.
āItās an additional time commitment,ā Gonzalez acknowledges, but the upside is that āyou immediately feel more in control of your money.ā
KEEP YOUR CASH SAFE
With so much cash on hand, itās important to secure it, says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling. āThere are all kinds of risks involved if youāre stuffing cash in places where you might forget it or heaven forbid something happens and the cash burns,ā he says.
Tim Melia, a certified financial planner and founder at Embolden Financial Planning in Seattle, suggests keeping the cash envelopes in a fireproof safe that locks. He adds that while news about bank collapses likely contributed to the appeal of cash, an FDIC-insured bank account is still the safest place to store money. (The Federal Deposit Insurance Corp. insures up to $250,000 per depositor, per bank and per ownership category.)
CONSIDER A HYBRID APPROACH
Gonzalez likes the idea of cash stuffing for everyday expenses but then moving larger amounts for savings or something like a house down payment into a bank account. āI donāt want that money sitting in an envelope,ā she says. Also, cash doesnāt earn interest, but if you move the money into a high-yield bank account, it can grow.
Melia says cash stuffing is a great way to get started with budgeting and see where your money is going for a month or so. āThen, transition to a spreadsheet and bank account,ā he recommends, noting that the discipline of the cash-stuffing method can stick with you.
McClary points out that many banks allow you to create digital envelopes for different categories in the form of separate bank accounts. For example, you might have labeled accounts for travel savings, down payment funds and everyday expenses, as well as a āfun moneyā account.
āThe money is still deposited with a financial institution and insured through the FDIC, but you are able to accomplish this kind of envelope approach and segment it into different spending categories,ā McClary says.
Severine Bryan, a personal finance educator and accredited financial counselor candidate, uses an approach she calls āfaux cash stuffingā because she doesnāt carry the bills around. Instead, she assigns set dollar amounts to different categories like food and transportation, makes sure not to exceed those dollar amounts, and uses her credit card to earn cash back while she spends.
āIām not using cash, but itās the same idea,ā she says.
DECIDE WHETHER ITāS A GOOD FIT
For some fans of the cash-stuffing method, the appeal comes down to the fact that youāre touching real cash. āIt feels more real and youāre more aware of your spending, whereas if youāre swiping a credit or debit card, or buying something on Amazon, it doesnāt feel real. Itās just the click of a button,ā Gonzalez says.
McClary notes that others are drawn to the simplicity of the method. āItās not overly complicated and you are less likely to end up in debt because it keeps you spending within your means.ā
Bryan says that cash stuffing likely works best for people who are more visual. āIf you donāt want the friction of writing numbers down, this method becomes more fun with colorful envelopes. It doesnāt even feel like budgeting,ā she says.
SKIP THE ACCESSORIES
Even if you like the cash-stuffing method, you donāt need to purchase the accessories marketed by TikTok influencers, which include cute wallets and designer envelopes. Those extra expenditures could make for a rough start to budgeting, Melia warns.
All you need is a stack of envelopes and a pen to label them ā and possibly a fireproof safe to keep all that cash secure.
______________________________
This column was provided to The Associated Press by the personal finance website NerdWallet. Kimberly Palmer is a personal finance expert at NerdWallet and the author of āSmart Mom, Rich Mom.ā Email: kpalmer@nerdwallet.com. Twitter: @KimberlyPalmer.
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NerdWallet: How to budget using the ācash-stuffingā envelope system https://bit.ly/nerdwallet-envelope-system