The Cost of Spending Cash

In December 2017, I recommended using cash for most face-to-face purchases as a way to maintain your personal privacy. I stand by that recommendation, and also recommend that you keep your non-investment savings in cash (not in a bank). Some readers have asked whether this privacy advice would cause them to lose out on interest income that they would otherwise earn by keeping their money in a bank.

According to Smart Asset, the median savings account balance, in the United States, is $5,200. The average, or mean balance is $33,766.49, but households with high incomes seriously skew the numbers when you calculate the mean.

The FDIC calculates the national average interest rate for deposits (i.e. savings accounts) as a simple average of rates paid by U.S. depository institutions. On June 4, 2018 the national average interest rate for savings accounts was 0.08%. Looking through advertised savings account interest rates in my state, requiring a minimum deposit of $5000 or less, the best interest rate I found was 0.60%.

So, lets say that you kept $5,200 in cash at home, rather than putting it in a savings account at your local bank, and let's assume that you can get a 0.60% interest rate if you deposit that money into a savings account at your bank.

 

At the end of the year, your $5,200 deposit would have grown to $5,231.29. So, the direct cost of not keeping your money in a savings account is $31.29 per year, or about $2.61 per month.

 

Is protecting your personal privacy worth $2.61 per month? 

 

There is another advantage to spending cash. Studies show that when people make purchases with cash, as opposed to using credit cards, they tend to spend less. And, of course there is no monthly interest rate assessed on cash purchases, unlike 10% - 25% rate you will pay if you carry a monthly balance on your credit card.   

Now, you probably can't completely avoid having a bank account. Most employers want to directly deposit your pay. For some things, making electronic payments makes sense. Re-occurring monthly bills may be paid directly from your account. However, after these payments are made you may want to withdraw the remainder of your pay in cash.

With cash in hand, it is easier to budget your spending for the month and when spending cash you greatly enhance your personal privacy by not creating a record of your purchases that can be tracked by your bank or credit card company.
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