Cash stuffing: How this budgeting method works

As a teacher, I am often telling my students that the one thing that will make them sound older sooner than they should will be their ability to ruminate on a time when they exchanged coloured pieces of paper (cash) for goods and services. 

With the rapid decrease in the use of cash and the ability to pay electronically – even at markets or for buskers – it is possible to imagine a time when using cash is a thing of the past. However, while the general trend of cash use is down, some people have moved toward cash stuffing, a process that uses physical cash as part of a budgeting and spending plan.

What is cash stuffing?

Cash stuffing is a budgeting approach that sees people using physical cash to manage their personal finance situation. People put money into labelled envelopes for different spending categories. 

It is interesting to see this trend at a time when cash usage is dropping sharply. Data from the RBA shows that in 2007, 69% of consumer payments in Australia were made using cash but by 2022 that number had dropped to just 13%.

How does cash stuffing work?

Let’s break it down into five key steps: 

Step 1: Set out a budget with spending grouped into important categories such as groceries, petrol, bills, dining out and savings. 

Step 2: Prepare your envelopes by labelling them with your categories. Each envelope will have its own category. There are likely to be some expenses such as the rent or mortgage that will still need to be paid electronically and won’t need an envelope.

Step 3: Withdraw the cash you have budgeted for all your spending and then ‘stuff’ the relevant envelopes. 

Step 4: Use the money from the appropriate envelope to make payments for your various categories. Remember to take the relevant envelopes with you when you are shopping or paying bills. 

Step 5: At the end of the month (or whatever time period you use), you can check your progress against what remains in the envelope – and then it is time to repeat the process. 

Why does cash stuffing work? 

The system of cash stuffing links to a number of important personal finance ideas, including using a budget, setting goals on how much you spend in important categories and regularly reflecting on your progress. 

Cash also has the unique characteristic of providing a tangible reminder of the goals you have set. For example, if you decide to spend $500 a month on entertainment, you can clearly see how that is progressing by keeping an eye on that envelope. 

Another factor in favour of using cash is the fact that research suggests we're likely to spend more when we use a credit card than we would with cash. A 2021 study by the MIT Sloan School of Management found that “credit cards serve to ‘step on the gas’ (of spending) by putting costs out-of-mind regardless of the price of the product”. 

For people who find themselves overspending using credit cards, the benefits of using cash might be significant. After all, the core of cash is that it can be linked to the effort that we take to earn it. For example, if you earn $25 an hour after tax, then the new $100 sunglasses that you are thinking of buying effectively take four hours of work to purchase and two $50 bills have to come out of your purse or wallet to pay for them.

The pros of cash stuffing

Cash stuffing is a tangible way of organising finances – and if that is something that works for you, then that makes it a great system.

The opposite of using cash stuffing is to use eftpos and credit or debit cards – however, these come with fees that either you or the retailer pay (and if the retailer pays them, they probably come back to you through slightly higher prices). Peter Drennan from Qi Insights suggests that when it comes to merchant fees, about $6.6 billion is paid annually. Given that there are about 20 million adults in Australia, that comes to around $300 each. In terms of surcharges paid by consumers, Drennan puts the cost at $971 million or around $47 per person. 

Cash stuffing links to the positive habits of budgeting and setting financial goals and as such links to the benefits of being deliberate in your personal finance planning.  

The cons of cash stuffing

With savings accounts currently paying around 5% interest, having money sitting in envelopes means you are missing out on potential interest earnings from using a high-paying bank account. 

There have been reports of theft of people using cash stuffing. As it has become a social media trend people have targeted the households of ‘cash stuffers’, knowing that there is a significant level of cash that can be taken from there.

There is also likely to be time involved in setting up and managing a cash stuffing system – from time going to the bank regularly to withdraw cash to the time taken to set up and review your budget.   

A digital alternative to cash stuffing

Perhaps a more ‘modern’ take on cash stuffing is a system of bank accounts, with each bank account set aside for specific spending. The ability to access multiple accounts through the one log-in, and transfer money quickly, makes this possible. The use of direct debits to automatically send the correct amount of money to each account, each pay, also makes this simple to set up. 

The two benefits of using online bank accounts is that the money set aside can have the benefit of earning interest – currently around $500 of interest for every $10,000 sitting in a good-quality bank account over the course of a year – and the transfers to the bank accounts can be automated each pay. 

The accounts and their labels can be similar to the envelopes – bills, groceries, petrol, entertainment. The most useful account I have seen is a ‘bills’ account, where a regular amount is deposited to make sure that when ‘lumpy’ expenses such as car or house insurance, registration and rates come, there is some cash set aside. 

Key takeaways 

For those people who are attracted to the idea of a cash-stuffing approach to managing their finances, starting with a budget and a series of online bank accounts might be the first step. 

However, for those people who tend to overspend when buying on plastic, moving to using physical envelopes and cash might be worth considering.  

Finally, if you do go down the cash stuffing route, being discreet about it on social media is the wise option from the safety perspective.