What are idle funds?

Definition and Example of Idle Funds

How Idle Money Works

How to Utilize Idle Funds

Definition and Example of Idle Funds

Idle funds are defined as money that is not actively used for the benefit of the entity that owns that money. The term idle funds can be heard in relation to saving and investing. When you invest in stocks or mutual funds, or add money to a savings account, you are putting that money to work. The goal in doing so is to increase your initial investment or deposit with interest. But money that is allowed to sit idle, on the other hand, does not work for you.

Having idle funds is not necessarily a bad thing. However, it is crucial to understand how it may affect your ability to build wealth over the long term.

How Idle Money Works

Idle money, idle funds, and stagnant funds all essentially mean the same thing: money that is sitting idle. There are various reasons for someone, a company, or a government to have idle funds. For example, you might have money sitting in your checking or cash management account and ultimately plan to move it to your online brokerage account. However, until you move that money, it sits idle and earns no interest for you.

On the other hand, a small business owner may have idle funds if they are accumulating reserve cash in a bank account that does not earn interest on it. They may have earmarked that money to purchase new equipment, renovate the business property, or pay an upcoming tax bill. Or they may keep a few thousand dollars in cash on hand. But if that money is not earning interest, it remains idle for the time being.

The common thread is that idle funds are not being utilized to their potential. However, idle funds can be turned into active money simply by opening a brokerage or savings account or using the money to make a business investment to help increase revenue.

How to Utilize Idle Funds

In the world of finance, idle funds can represent a missed opportunity because your money has no chance to grow if it is not earning interest.

For example, let’s assume you sold your car and now have $10,000 in cash. You do not plan to buy a new car at the moment, so you are trying to decide what to do with the money for now. The first option is to keep it under your mattress until you need it, while the second option is to put it in a savings account. If you choose the first option, your money has no chance to grow. If you choose the second option and earn 1% annual percentage yield (APY), you will earn $100 in interest if you keep the money there for one year.

You could also consider investing in stocks to earn what is called compound interest, which is the interest that is earned on the initial investment plus the accumulated interest (interest on interest). For example, suppose you took that $10,000 and invested it in the market. Assuming you achieve a 7% annual return rate, using a compound interest calculator, your money could grow to $10,700 after one year. If you left that money alone for 20 years, it could grow to nearly $38,697 at a 7% rate. You could increase that amount further if you made additional deposits.

The example above illustrates how costly idle funds can be, especially when considering inflation. Inflation represents an increase in the cost of goods and services over time. Investing is a way to counteract the effects of inflation if your money grows faster than the rate of rising prices. When you allow your money to sit idle, it creates a greater risk for inflation because it erodes your purchasing power over time.

Source:

https://www.thebalancemoney.com/what-are-idle-funds-5207728

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